EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
The following table sets forth selected consolidated financial information of
the Company for the five years in the period ended December 31, 2000. The
selected consolidated financial data presented below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and our Consolidated Financial Statements and Notes
thereto included in this report. The historical results presented herein may not
be indicative of future results.
December 31 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash and cash equivalents, restricted
cash and short-term investments $ 219,431 $ 49,813 $ 6,257 $ 5,382 $ 12,881
Working capital 313,825 133,839 251,991 228,001 345,530
Total assets 1,648,259 1,499,879 1,068,690 714,541 936,070
Long-term debt 13,493 14,532 205,044 127,089 252,725
Other long-term liabilities 164,765 175,611 1,317 1,246 759
Convertible subordinated notes 200,000 200,000 71,345 90,881 102,131
Total shareholders' equity 904,437 574,701 342,859 207,070 169,011
Year Ended December 31 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations Data:
Total Revenue $2,770,381 $2,993,644 $2,314,258 $2,017,643 $2,088,293
Operating Expenses
Cost of sales 2,441,842 2,641,276 1,998,843 1,716,788 1,810,284
Selling, service and general and
administrative 349,557 316,483 270,250 228,548 214,862
Depreciation and amortization 33,462 30,528 21,738 18,132 20,645
Restructuring 5,417 387 16,437 -- --
--------------------------------------------------------------
Total operating expenses 2,830,278 2,988,674 2,307,268 1,963,468 2,045,791
--------------------------------------------------------------
(59,897) 4,970 6,990 54,175 42,502
Gains on issuance of stock by affiliates -- 175,662 3,782 5,772 5,582
Other income, net 93,105 128,404 208,697 21,085 25,546
Interest income 18,097 4,839 2,742 2,474 1,893
Interest and financing expense (41,897) (41,807) (29,720) (22,359) (23,916)
--------------------------------------------------------------
Income Before Income Taxes, Minority
Interest and Equity Income (Loss) 9,408 272,068 192,491 61,147 51,607
Income taxes 100,323 (66,514) (61,424) (14,336) (13,285)
Minority interest (2,213) (8,936) (47) (25,727) (19,934)
Equity income (loss) (319,922) (73,092) (20,897) 417 1,539
- ------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (212,404) $ 123,526 $ 110,123 $ 21,501 $ 19,927
- ------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share
Basic $(1.86) $1.22 $1.15 $0.23 $0.22
Diluted $(1.87) $1.16 $1.07 $0.22 $0.20
Weighted Average Shares Outstanding
Basic 114,068 101,134 95,499 93,747 89,700
Diluted 114,068 110,910 104,742 95,988 94,044
No cash dividends have been declared in any of the years presented, and the
Company has no present intention to declare cash dividends.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The statements contained in this Annual Report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve certain risks,
uncertainties and other factors that could cause actual results to be materially
different than those contemplated by these statements. These risks and
uncertainties include the factors described elsewhere in this report and in our
filings with the SEC, including our Annual Report on Form 10-K for the year
ended December 31, 2000. We do not assume any obligation to update any forward-
looking statements or other information contained in this Annual Report.
Although we refer in this report to the companies in which we have acquired an
equity ownership interest as our "partner companies" and that we indicate that
we have a "partnership" with these companies, we are not a "partner" in a legal
sense, and do not act as an agent or legal representative for any of our partner
companies, we do not have the power or authority to legally bind any of our
partner companies and we do not have the types of liabilities in relation to our
partner companies that a general partner of a partnership would have.
Certain amounts for prior periods in the consolidated financial statements,
and in the discussion below, have been reclassified to conform with current
period presentations.
General
We are a leader in identifying, developing and operating emerging technology
companies through our extensive network of partner companies and private equity
funds (collectively, affiliates). Our operations are classified into three
operating segments: i) General Safeguard Operations; ii) Partner Company
Operations; and iii) CompuCom Operations. We acquire interests in developing
infrastructure technology companies, accelerate their growth and integrate these
companies into our operating network. We focus on what we believe to be the most
significant market sectors of the infrastructure technology industry: software,
communications and e-Services. We believe our experience developing technology
companies, our expertise in and focus on infrastructure technology and the reach
of our network enable us to identify and attract companies with significant
potential for success in the infrastructure technology market.
Our principal mission is to create long-term shareholder value. We believe
shareholder value is maximized by retaining and promoting the entrepreneurial
culture of the partner companies that we operate. The entrepreneurs of our
partner companies generally retain significant equity interests in their
businesses, and their interests as shareholders remain aligned with ours. We
provide a full range of operational and management services to each of our
partner companies through dedicated teams of our professionals. Each team has
expertise in the areas of business and technology strategy, sales and marketing,
operations, finance and legal and transactional support, and provides hands-on
assistance to the management of the partner company in support of its growth.
The level of involvement varies and in some circumstances includes the provision
of full-time interim personnel. Since we are a long-term partner, we pursue
various alternatives to maximize the long-term value of our partner companies.
These alternatives include preparing our partner companies for initial public
offerings, assisting with mergers and acquisitions and facilitating additional
capital raising activities.
We participate in managing 12 private equity funds which are located on our
corporate campus. In addition, we are a limited partner in 6 other private
equity funds. Collectively, these 18 funds, which have over $3.8 billion of
committed capital, augment our network by providing us with an expanded base
through which we conduct our operations, including acquisition syndication
opportunities. We believe our network of private equity funds creates
opportunities for us and our partner companies to form strategic alliances and
partnerships that may develop or enhance their businesses. Also, the personal
relationships and expertise of the professionals employed by these funds are
important resources for developing and evaluating acquisition opportunities. We
frequently refer opportunities that may not fit our operating strategy to an
appropriate fund.
Because we acquire significant interests in technology-related developing
companies, many of which generate net losses, we have experienced, and expect to
continue to experience, significant volatility in our quarterly results. While
some of our
affiliates have consistently reported losses, we have recorded net income in
certain periods and experienced significant volatility from period to period
due, in part, to one-time transactions and other events incidental to our
ownership interests in and advances to affiliates. We do not know if we will
report net income in any period. These transactions and events include
dispositions of, and changes to, our affiliate ownership interests, dispositions
of our holdings of affiliates and impairment charges. On a continuous basis, but
no less frequently than at the end of each quarterly reporting period, we
evaluate the carrying value of our ownership interests in and advances to each
of our affiliates for possible impairment based on achievement of business plan
objectives and milestones, the fair value of each ownership interest in and
advances to each affiliate relative to its carrying value, the financial
condition and prospects of the affiliate and other relevant factors. The
business plan objectives and milestones we consider include, among others, those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature, such as the hiring of key employees or the
establishment of strategic relationships. The fair value of our ownership
interests in and advances to privately held partner companies is generally
determined based on the value at which independent third parties have invested
or have committed to invest in these companies. The fair value of our ownership
interests in private equity funds is generally determined based on the value of
our pro rata portion of the funds' net assets.
We operate in an industry which is rapidly evolving and extremely competitive.
It is reasonably possible that our accounting estimates with respect to the
useful life and ultimate recoverability of the carrying value, including
goodwill, could change in the near term and that the effect of such changes on
our consolidated financial statements could be material. While we believe that
the current recorded carrying values of our affiliates are not impaired, there
can be no assurance that our future results will confirm this assessment or that
a significant write-down or write-off of the carrying value will not be required
in the future.
Effect of Various Accounting Methods on the Consolidated Financial Statements
The various interests that we acquire in our partner companies and private
equity funds are accounted for under three broad methods: consolidation, equity
and cost. The applicable accounting method is generally determined based on our
voting interest in the entity.
Consolidation. Partner companies in which we directly or indirectly own more
than 50% of the outstanding voting securities are generally accounted for under
the consolidation method of accounting. If this majority voting ownership is
likely to be temporary, we account for the company under the equity method.
Under the consolidation method, a partner company's results of operations are
included within our consolidated statements of operations. Participation of
other partner company shareholders in the income or losses of a consolidated
partner company is reflected in minority interest in our consolidated statements
of operations. Minority interest adjusts our consolidated net income (loss) to
reflect only our share of the earnings or losses of the consolidated partner
company. CompuCom Systems, Inc. and Tangram Enterprise Solutions, Inc. were
consolidated in 2000, 1999 and 1998. In 1999, we acquired controlling majority
voting interests in aligne, incorporated, SOTAS, Inc. and Arista Knowledge
Systems Inc. In August 2000, aligne acquired 100% of K Consultants. Each of
these partner companies was consolidated from the date we acquired directly or
indirectly more than 50% of the outstanding voting securities interest. Arista
was sold in July 2000 and is included in our consolidated operating results
through its sale date.
Equity Method. Partner companies and private equity funds whose results we do
not consolidate, but over whom we exercise significant influence, or for whom
majority voting ownership is likely to be temporary, are generally accounted for
under the equity method of accounting. Whether or not we exercise significant
influence with respect to a partner company depends on an evaluation of several
factors including, among others, our representation on the partner company's
board of directors and ownership level, which is generally a 20% to 50% interest
in the voting securities of the partner company, including voting rights
associated with our holdings in common, preferred and other convertible
instruments in the partner company. Under the equity method of accounting, a
partner company's results of operations are not reflected within our
consolidated statement of operations; however, our share of the income or losses
of the partner company is reflected in equity income (loss) in our consolidated
statements of operations. The share of income or losses is generally based upon
our voting ownership of the partner company's
securities, which may be different from the percentage of the economic ownership
of the partner company held by us. We also account for our interests in some
private equity funds under the equity method of accounting, based on our
respective general and limited partner interests.
The effect of an affiliate's net results of operations on our results of
operations is the same under either the consolidation method of accounting or
the equity method of accounting, because under each of these methods only our
share of the income or losses of an affiliate is reflected in our net results of
operations in the consolidated statements of operations.
Our partner companies accounted for under the equity method of accounting at
December 31, 2000 included:
Partner
Company Voting
Since Ownership
- -------------------------------------------------------
Publicly Traded:
Cambridge Technology Partners 1991 17%
ChromaVision Medical Systems 1996 30%
DocuCorp International 1995 18%
eMerge Interactive 1997 17%
Internet Capital Group 1996 14%
Lifef/x 1996 12%
OAO Technology Solutions 1996 31%
Sanchez Computer Associates 1986 25%
USDATA Corporation 1994 40%
Privately Held:
AgWeb.com 2000 43%
Atlas Commerce 2000 35%
Buystream 2000 31%
Data Center Direct 2000 76%
eonDigital 2000 11%
iMedium 1999 31%
Kanbay 1998 30%
Mi8 2000 27%
NexTone Communications 2000 38%
Nextron Communications 1995 54%
Persona 1999 30%
Presideo 1998 41%
QuestOne Decision Sciences 1997 31%
REALTIME MEDIA, Inc. 1999 43%
Redleaf Group 1999 30%
TechSpace 2000 45%
ThinAirApps 2000 34%
WebTelecom 2000 53%
Wireless OnLine 2000 43%
We have representation on the boards of directors of these partner companies.
Although we own less than 20% of the voting stock of some of these companies, we
believe we have the ability to exercise significant influence based on our
representation on each company's board of directors and other factors. We own
greater than 50% of the voting stock of some of these companies; however, we
believe majority voting ownership is temporary. In addition to our holdings in
equity and debt securities, we also periodically make advances to our affiliates
in the form of promissory notes. The carrying value of advances to affiliates
totaled $7.3 million and $36.0 million at December 31, 2000 and 1999.
Cost Method. Partner companies and private equity funds that we do not
account for under either the consolidation or the equity method of accounting
are accounted for under the cost method of accounting. Under this method, our
share of the income or losses of these entities is not included in our
consolidated statements of operations. However, the effect of the change in
market value of cost method holdings classified as trading securities is
reflected in our results of operations during each reporting period.
Effect of Various Accounting Methods on the Presentation of our Consolidated
Financial Statements
The presentation of our financial statements may differ from period to period
primarily due to the applicable accounting method used for recognizing our
equity interests in the operating results of an affiliate. For example, the
presentation of our financial statements are significantly influenced by the
consolidated results of operations of CompuCom, which we consolidate based on
our 59% voting interest.
To understand our net results of operations and financial position without the
effect of consolidating our consolidated partner companies, please refer to note
18 to our consolidated financial statements, which summarizes our parent company
statements of operations and balance sheets and presents consolidated partner
companies as if they were accounted for under the equity method of accounting.
Our share of the income or losses of the consolidated partner companies is
included in equity income (loss) in the parent company statements of operations.
The carrying value of these companies is included in ownership interests in and
advances to affiliates in the parent company balance sheets.
Although the parent company statements of operations and balance sheets
presented in note 18 reflect our historical results, they are not necessarily
indicative of future parent company balance sheets and statements of operations.
Net Results of Operations
The following table reflects consolidated operating data by reported segments.
All significant intersegment activity has been eliminated. Accordingly, segment
results reported exclude the effect of transactions between us and our
subsidiaries.
Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Net Income (Loss) (in thousands)
General Safeguard Operations $ 58,883 $173,006 $122,488
Partner Company Operations (274,260) (57,192) (12,441)
CompuCom Operations 2,973 7,712 76
- ---------------------------------------------------------------------------------------------------------------------------
$(212,404) $123,526 $110,123
- ---------------------------------------------------------------------------------------------------------------------------
Net Results of Operations - General Safeguard Operations
General Safeguard Operations includes the expenses of providing strategic and
operational support to our affiliates, and also includes the effect of certain
private equity funds that we account for under the equity method. General
Safeguard Operations also includes the effect of transactions and other events
incidental to our ownership interests in our partner companies and our
operations in general.
Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenue $ 22,299 $ 13,912 $ 11,949
Operating expenses
General and administrative 88,042 43,429 24,413
Depreciation and amortization 2,178 1,664 1,443
------------------------------------------------------------------
Total operating expenses 90,220 45,093 25,856
------------------------------------------------------------------
(67,921) (31,181) (13,907)
Gains on issuance of stock by affiliates -- 175,662 3,782
Other income, net 92,115 128,404 209,646
Interest and financing expense, net (6,949) (13,443) (7,964)
------------------------------------------------------------------
Income before income taxes and equity income 17,245 259,442 191,557
Income taxes (35,270) (87,018) (69,069)
Equity income 76,908 582 --
- ---------------------------------------------------------------------------------------------------------------------------
Net Income from General Safeguard Operations $ 58,883 $173,006 $122,488
- ---------------------------------------------------------------------------------------------------------------------------
Revenue. Revenue consists of management fees charged to private equity funds
for operational and management services, and administrative service fees charged
to certain partner companies. Revenue was $22.3 million, $13.9 million and
$11.9 million for the years ended December 31, 2000, 1999 and 1998. This
increase was related to additional management fees charged to private equity
funds as a result of the formation of additional private equity funds during
2000. Effective April 1, 2000, we no longer charged administrative service fees
to our partner companies. These fees accounted for $0.1 million, $1.9 million
and $2.1 million of revenue for the years ended December 31, 2000, 1999 and
1998.
General and Administrative. Our general and administrative expenses consist
primarily of employee compensation, outside services such as legal, accounting
and consulting, and travel-related costs. Excluding non-cash charges of $12.6
million in 2000 related to a stock grant, acceleration of stock options as part
of severance packages and stock options granted to non-employee consultants,
general and administrative expenses increased to $75.4 million for the year
ended December 31, 2000 from $43.4 million for the year ended December 31, 1999
and $24.4 million for the year ended December 31, 1998. The number of partner
companies increased from 37 at December 31, 1999 to 44 at December 31, 2000. Our
headcount and professional fees increased during 2000 to support our increased
acquisition activity, our operations and the operations of our partner
companies. We expect general and administrative costs to decrease in 2001 as a
result of certain cost reduction efforts undertaken in the fourth quarter of
2000, including a reduction in headcount and other operating costs.
Gains on Issuance of Stock by Affiliates. These gains represent gains on the
issuance of stock by our affiliates to reflect the change in our share of the
net equity of these companies. For the year ended December 31, 1999, we
recognized $173 million of gains related to the issuance by Internet Capital
Group of 31 million shares of its common stock in its initial public offering in
August 1999, seven million shares of its common stock in a follow-on public
offering in December 1999 and three million shares in private placements and
acquisitions completed in the fourth quarter of 1999. This pretax gain
represents the increase in our share of Internet Capital Group's net equity as a
result of its stock issuances. In 1999 and 1998, we recorded gains on stock
issued by other affiliates as a result of stock option exercises. No gains were
recognized on the issuances of stock by our affiliates in 2000 as we had the
intent and ability to complete subsequent capital transactions, including
purchases in the open market, that may impact the ultimate realization of the
gain.
Other Income, Net. Other income, net, for the General Safeguard Operations
segment consisted of the following (in millions):
Year Ended
December 31 2000 1999 1998
- -------------------------------------------------------------------
Gain on sale of public
holdings $ 60.6 $ 64.9 $ 17.7
Gain on sale of private
partner companies 55.7 4.5 --
Gain on the Coherent/
Tellabs merger -- -- 245.3
Unrealized gain (loss)
on trading securities (5.0) 78.2 (48.5)
Other, primarily
impairment charges (19.2) (19.2) (4.9)
- -------------------------------------------------------------------
$ 92.1 $128.4 $209.6
- -------------------------------------------------------------------
During 2000, we sold shares of public holdings, including Diamond Technology
Partners and eMerge Interactive (in its IPO), for aggregate net proceeds of
$91.3 million and recorded gains of $60.6 million. During 1999, we sold shares
of public holdings, including Diamond Technology Partners, and Internet Capital
Group and Pac-West Telecomm (in their IPOs), for aggregate net proceeds of $75.9
million and recorded gains of $64.9 million. During 1998, we sold shares of
public holdings, including Cambridge Technology Partners, for aggregate net
proceeds of $23.3 million and recorded gains of $17.7 million.
During 2000, we sold several of our holdings in private partner companies,
including Arista Learning Systems, Extant Communications and Multigen. The
aggregate net proceeds, including cash, stock and proceeds from the subsequent
sales of stock received in the transactions, totaled $66.1 million, of which
$6.0 million was held in escrow. We recorded net gains of $55.7 million on the
sale of private partner companies in 2000.
Included in other income, net, for the years ended December 31, 2000, 1999 and
1998 are impairment charges of approximately $19.7 million, $16.4 million and
$17.0 million for certain holdings accounted for under the cost method
determined to have experienced an other than temporary decline in value. For
the year ended December 31, 2000, the
impairment charges included $17.9 million related to the other than temporary
decline in two public partner stock prices.
Interest and Financing Expense, Net. Interest expense was $6.9 million for
the year ended December 31, 2000, $13.4 million for the year ended December 31,
1999 and $8.0 million for the year ended December 31, 1998. The decrease in 2000
was the result of increased interest income earned in 2000 from funds raised in
our follow-on public offering and from strategic investors, partially offset by
increased interest expense as a result of our subordinated notes issued in June
1999 and the accretion of the obligation and amortization of the cost of the two
forward sale contracts on our Tellabs holdings entered into in March and August
of 1999. The increase in 1999 compared to 1998 is due to the accretion of the
obligation and amortization of the cost of the two forward sale contracts,
partially offset by higher interest income.
Income Taxes. Our consolidated effective tax rate decreased to 32.1% in 2000
compared to 35% for 1999. This rate differs from the federal statutory rate due
primarily to non-deductible goodwill amortization.
Net Results of Operations - Partner Company Operations
Partner Company Operations reflects the operations of all of our partner
companies other than CompuCom (included in CompuCom Operations). The partner
companies included in Partner Company Operations are accounted for under either
the consolidation or the equity method.
Year Ended December 31 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenue $ 37,445 $ 27,469 $ 20,678
Operating expenses
Cost of sales 16,346 8,082 2,426
Selling and service 16,169 8,875 8,087
General and administrative 12,124 13,572 5,309
Depreciation and amortization 8,182 5,497 2,872
------------------------------------------------------------------
Total operating expenses 52,821 36,026 18,694
------------------------------------------------------------------
(15,376) (8,557) 1,984
Other income, net -- -- (949)
Interest and financing expense, net (1,573) (330) (272)
------------------------------------------------------------------
Income (loss) before income taxes, minority
interest and equity loss (16,949) (8,887) 763
Income taxes 138,546 25,435 7,693
Minority interest 973 (66) --
Equity loss (396,830) (73,674) (20,897)
- -----------------------------------------------------------------------------------------------------------------------------
Net Loss from Partner Company Operations $(274,260) $(57,192) $(12,441)
- -----------------------------------------------------------------------------------------------------------------------------
Revenue. Revenue consists of charges for consulting services by our wholly
owned subsidiary, aligne, and K Consultants subsequent to its acquisition by
aligne in August 2000. Revenue also includes sales by Tangram, and SOTAS
subsequent to its acquisition in 1999. Revenue was $37.4 million for the year
ended December 31, 2000, $27.5 million for the year ended December 31, 1999 and
$20.7 million for the year ended December 31, 1998. The increase in revenue in
2000 was the result of the acquisition of K Consultants in 2000 and increased
revenue at SOTAS, partially offset by a reduction in revenue at Tangram.
Revenue increased in 1999 compared to 1998 as a result of the acquisition of
aligne and SOTAS in 1999.
Operating Expenses. Operating expenses were $52.8 million for the year ended
December 31, 2000, $36.0 million for the year ended December 31, 1999 and $18.7
million for the year ended December 31, 1998. The increase in operating
expenses in 2000 compared to 1999 was due to the acquisition of K Consultants in
2000 and increased operating costs at SOTAS to support its growth. The increase
in operating expenses in 1999 was the result of the acquisition of aligne,
Arista and SOTAS in 1999.
Equity Loss. A significant portion of our net results of operations is
derived from companies in which we hold a significant minority ownership
interest. Under the equity method of accounting, if we exercise significant
influence over a partner company, we record our share of the income or losses of
that partner company in our consolidated statements of operations. The share of
income or losses is generally based upon our voting ownership of the partner
company's securities. Our carrying value for a partner company accounted for
under the equity method includes the unamortized excess of the cost of our
interest in the partner company over its equity in the underlying net assets
determined at the date of acquisition. This excess is amortized on a straight-
line basis generally over a 3 to 10 year period and is included in equity income
(loss) in the consolidated statements of operations.
Equity income (loss) fluctuates with the number of companies accounted for
under the equity method, our voting ownership percentage in these companies, the
amortization of goodwill related to newly acquired equity method companies and
the net results of operations of these companies. Equity income (loss) also
includes impairment charges when management determines there has been an other
than temporary decline in the carrying value of its ownership interest relative
to the fair value. During the year ended December 31, 2000, we accounted for 39
companies under the equity method of accounting compared to 29 companies during
the comparable 1999 period.
Of the $396.8 million of equity loss for the year ended December 31, 2000,
$89.1 million of loss was attributable to Internet Capital Group, $28.2 million
related to goodwill amortization and $129.0 million was attributable to write-
downs for other than temporary declines in value of partner companies accounted
for under the equity method. The remaining $150.5 million of equity loss was
attributable to our share of 38 partner companies operating results, a majority
of which have losses.
Our share of the equity method partner company results of operations was
impacted by various one-time transactions and other events incidental to
ownership of our partner companies. The reported results of operations of our
partner companies included restructuring charges, equity-based compensation
costs and additional selling, general and administrative, technology, operating
and personnel costs as our partner companies continue their development and
transition their business models.
We accounted for 29 companies under the equity method in 1999 versus 14
companies during 1998. The increase in equity losses in 1999 from 1998 reflects
the increase in the number of partner companies accounted for under the equity
method, a majority of which have operating losses, and increased operating
losses at some of our existing partner companies. Of the $73.7 million of
equity loss for the year ended December 31, 1999, $5.9 million of loss was
attributable to our ownership in Internet Capital Group and $9.5 million was
related to goodwill amortization. The remaining $58.3 million of equity loss was
attributable to our share of 28 partner companies' operating results, a majority
of which have losses.
Certain amounts recorded to reflect our share of the income or losses of our
partner companies accounted for under the equity method are based on estimates
and on unaudited results of operations of those partner companies and may
require adjustments in the future when audits of these entities are made final.
Many of our privately held, equity method partner companies are technology-
related companies with limited operating histories that have not generated
significant revenues and incurred substantial losses in 2000. We expect these
losses to continue in 2001. We expect to continue to acquire interests in more
technology-related companies that may have operating losses and that we may
account for under the equity method. Additionally, we expect certain of our
existing partner companies to continue to invest in their products and services
and to recognize operating
losses. As a result, equity losses could continue to increase significantly.
Additionally, we operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that the impairment factors evaluated by
management will change in subsequent periods, given that we operate in a
volatile business environment. This could result in material impairment charges
in future periods.
Net Results of Operations - CompuCom Operations
CompuCom Operations reflects the results of our majority-owned subsidiary,
CompuCom.
Year Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenue
Product sales $2,439,106 $2,648,342 $2,007,744
Service sales 271,531 303,922 273,887
------------------------------------------------------------------------
2,710,637 2,952,264 2,281,631
Operating expenses
Cost of sales 2,425,496 2,633,194 1,996,417
Selling and service 134,182 156,163 159,628
General and administrative 99,040 94,445 72,813
Depreciation and amortization 23,102 23,367 17,423
Restructuring 5,417 387 16,437
------------------------------------------------------------------------
Total operating expenses 2,687,237 2,907,556 2,262,718
------------------------------------------------------------------------
23,400 44,708 18,913
Other income, net 990 -- --
Interest and financing expense, net (15,278) (23,195) (18,742)
------------------------------------------------------------------------
Income before income taxes and
minority interest 9,112 21,513 171
Income taxes (2,953) (4,931) (48)
Minority interest (3,186) (8,870) (47)
- -------------------------------------------------------------------------------------------------------------------------------
Net Income from CompuCom Operations $ 2,973 $ 7,712 $ 76
- -------------------------------------------------------------------------------------------------------------------------------
Revenue. Product revenue, which is primarily derived from the sale of
desktop, mobile computing, web computing and network computer products to
corporate clients, decreased approximately 7.9% in 2000 to $2.4 billion from
$2.6 billion in 1999, and increased 31.9% in 1999 from $2.0 billion in 1998.
CompuCom believes product revenue was negatively impacted by manufacturer direct
selling and fulfillment initiatives as well as lower product demand when
compared to last year's higher than normal spending by its clients as part of
their preparation for the Year 2000. These factors were partially offset by the
positive impact of the May 1999 Entex acquisition. Service revenue is primarily
derived from field engineering, LAN/WAN projects, consulting, configuration,
help desk, asset tracking, network management, software management and services
provided in support of certain manufacturers' direct fulfillment initiatives.
Service revenue reflects revenue generated by the actual performance of specific
services and does not include product sales associated with service projects.
Service revenue decreased approximately 10.7% in 2000 compared to 1999, and
increased 11.0% in 1999 compared to 1998. The decline in service revenue in
2000 was primarily due to lower demand for CompuCom's consulting services, which
is partially attributed to its clients' Year 2000 concerns and higher spending
on Year 2000 related projects that occurred in 1999 and not in 2000.
Gross Margin. Product gross margin was 7.6%, 8.2% and 9.7% for the years
ended December 31, 2000, 1999 and 1998. The decreases are primarily due to
increased competition from direct marketers and other companies that sell
personal computer products. Service gross margin was 36.5%, 33.9% and 32.9% for
the years ended December 31, 2000, 1999 and 1998.
The increase was due primarily to improvements in the management and utilization
of service-related resources and a greater mix of services being performed that
generally have a higher gross margin.
CompuCom expects to experience continued pressure on both revenue and gross
margin, the result of which may be lower revenue and related gross margin when
compared to the comparable prior year period.
Selling and Service. Selling and service expenses were 5.0%, 5.3% and 7.0% of
revenue for the years ended December 31, 2000, 1999 and 1998. CompuCom
attributes this decrease to its own cost reduction efforts and integration costs
incurred in 1999 as part of the Entex acquisition.
General and Administrative. General and administrative expenses increased
$4.6 million in 2000 and increased $21.6 million in 1999 compared to the prior
year periods. The 1999 increase is primarily due to expenditures to continue
expansion of CompuCom's electronic commerce capabilities as well as increases in
distribution and administrative personnel to support its revenue growth and
expenses resulting from the Entex acquisition.
Depreciation and Amortization. Depreciation and amortization expense was
$23.1 million in 2000, $23.4 million in 1999 and $17.4 million in 1998. The
increase primarily relates to amortization of goodwill on two acquisitions
completed during the second quarter of 1998 and the Entex acquisition, completed
during the second quarter of 1999.
Restructuring. In 2000, CompuCom implemented a restructuring plan designed to
reduce its cost structure by closing and consolidating certain facilities and
reducing its workforce. As a result, CompuCom recorded a restructuring charge
of $5.2 million in the first quarter of 2000, primarily consisting of costs
associated with the closing and consolidation of certain facilities and
disposing of related fixed assets as well as employee severance and benefits
related to the reduction in workforce. Approximately $2.7 million was paid
through December 31, 2000. In October 1998, CompuCom approved a restructuring
plan designed to reduce its cost structure by closing branch facilities and
reducing its workforce. As a result, CompuCom recorded a restructuring charge
in 1998 of $16.4 million. The charge primarily consisted of costs associated
with the closing of certain facilities and disposing of related fixed assets, as
well as employee severance and benefits related to the reduction in workforce.
Interest and Financing Expense, Net. Interest and financing expense, net was
$15.3 million, $23.2 million and $18.7 million for the years ended December 31,
2000, 1999 and 1998. The decline in 2000 is due to greater financing
requirements in 1999 mainly due to the Entex acquisition, partially offset by an
increase in CompuCom's effective interest rate in 2000 to 8.2% as compared to
7.7% in 1999. The 1999 increase was primarily related to higher borrowing
levels due to the Entex acquisition, as well as an increase in CompuCom's 1999
effective interest rate to 7.7% compared to 6.6% in 1998.
Liquidity And Capital Resources
We have funded our operations with proceeds from the issuance of equity
securities and convertible notes, proceeds from forward sale contracts, proceeds
from sales of partner companies, distributions from private equity funds and our
bank credit facilities.
In March 2000, we closed the sale of 2.2 million shares of our common stock at
$45.83 per share, or $100 million total, to Textron in a private placement.
In April 2000, we completed a follow-on public offering, selling 8.6 million
shares of our common stock, including exercise in full of the underwriters'
over-allotment option, at $50 per share. The net proceeds were approximately
$414 million.
In March 2000, we filed a Registration Statement to sell up to $500 million of
our common stock to certain strategic investors and institutional investors. In
April 2000, we completed the first tranche of this offering with a sale of 2.0
million shares at $50 per share, or $100 million total, to IBM and Compaq.
Proceeds from sales of and distributions from affiliates were $173 million in
2000 (excluding CompuCom's sale of equity securities which generated proceeds of
$3 million), $138 million in 1999 and $95 million in 1998.
At December 31, 2000, we had bank revolving credit facilities of up to $300
million depending on the market value of pledged securities. Of the $300
million, $250 million matures in April 2005 and is secured by equity securities
of certain of our publicly traded holdings (the pledged securities). The
remaining $50 million is unsecured, with availability limited to the lesser of
$50 million or 10% of the value of the pledged securities. The $50 million
facility matures in April 2001. Availability under our bank credit facilities
is determined by the market value of the pledged securities. If the stock
markets decline significantly, availability under the credit facilities could be
reduced significantly and could have an adverse effect on our ability to borrow
under the facilities. Our ability to raise proceeds from sales of publicly
traded partner companies also could be adversely affected by market declines.
Availability under our credit facility at December 31, 2000 was $118 million and
there were
no amounts outstanding. As of March 15, 2001, the availability under the
facility was $137 million. At December 31, 2000, we were not in compliance with
a financial covenant under our credit facilities. In 2001, our bank group waived
this covenant through March 30, 2001, and we agreed that the pledged securities
will also collateralize the $50 million facility. Unless our bank group extends
this waiver beyond March 30, 2001, we will not be able to make draws under our
existing credit facilities. We are currently negotiating a new credit facility
totaling $100 million, but there can be no assurance that we will be able to
complete this agreement.
Our cash and cash equivalents and short-term investments at December 31, 2000
and other internal sources of cash flow are expected to be sufficient to fund
our cash requirements through 2001, including commitments to our existing
affiliates, our current operating plan to acquire interests in new affiliates
and our general corporate requirements. At December 31, 2000, we were
contingently obligated for approximately $12 million of guarantee commitments.
Additionally, during October 2000, we guaranteed a $35 million loan to our
Chairman and CEO in connection with margin loan arrangements. The guarantee
arrangement is secured by interests in securities and real estate. As of
December 31, 2000 and March 15, 2001, in addition to the securities and real
estate collateral, we held $0.9 million and $2.3 million in a cash account which
was deposited by our Chairman and CEO to further collateralize our obligations
under the guarantee. Additionally, we had committed capital of approximately
$169 million, including commitments made in prior years, to various affiliates,
to be funded over the next several years, including approximately $90 million
which is expected to be funded in the next twelve months.
CompuCom maintains separate, independent financing arrangements, which are
non-recourse to us and are secured by certain assets of CompuCom. During recent
years, CompuCom has utilized bank financing arrangements and internally
generated funds to fund its cash requirements.
As of December 31, 2000, CompuCom has financing arrangements consisting of a
$150 million receivables securitization facility and a $100 million working
capital facility. The working capital facility matures in May 2002, and $125
million of the receivables securitization matures in April 2002 with the
remainder in September 2003. As of December 31, 2000, the receivables
securitization facility was fully utilized. Availability under the working
capital facility is subject to a borrowing base calculation. Availability under
the working capital facility was approximately $76 million, and no amounts were
outstanding. Both the receivables securitization facility and the working
capital facility are subject to CompuCom's compliance with selected financial
covenants and ratios.
CompuCom's liquidity continues to be negatively impacted by the dollar volume
of certain manufacturers' rebate programs. Under these programs, CompuCom is
required to pay a higher initial amount for product and claim a rebate from the
manufacturer to reduce the final cost. The collection of these rebates can take
an extended period of time. Due to these programs, CompuCom's initial cost for
the product is often higher than the sales price CompuCom can obtain from its
customers. These programs are a material factor in CompuCom's financing needs.
As of December 31, 2000, CompuCom was owed approximately $53 million under these
vendor rebate programs.
CompuCom's ability to make distributions to its shareholders is limited by
restrictions in CompuCom's financing agreements and CompuCom's working capital
needs. We do not consider CompuCom's liquidity to be a source of liquidity to
us.
Consolidated working capital increased to $314 million at December 31, 2000
compared to $134 million at December 31, 1999. This increase is due to the
increase in cash and cash equivalents and short-term investments in 2000 as a
result of our follow-on public offering and the sale of our common stock to
strategic investors.
Cash provided by operating activities decreased in 2000 compared to 1999 due
to a decrease in 2000 of CompuCom's receivables securitization facility by $100
million, which resulted in an increase of accounts receivable. The decrease was
also due to a reduction in CompuCom's accounts payable in 2000 compared to 1999.
Cash used in investing activities primarily reflects the acquisition of
ownership interests in and advances to affiliates. Cash used in investing
activities also reflects acquisitions by our subsidiaries. The increase in cash
used in investing activities in 2000 reflects the increased acquisition activity
during 2000.
During 2000, we made net commitments of approximately $265 million of cash and
$3.8 million of our common stock to acquire interests in and make advances to 18
new partner companies, and we committed $80 million to three new private equity
funds. During 2000, we funded cash of $232 million to new partner companies,
$165 million to existing partner companies and $61 million to new and existing
private equity funds. In addition, we purchased approximately $39 million of
shares of our publicly
traded partner companies in the open market. During 2000, we purchased 1.5
million shares of our common stock in the open market for a total of $46.5
million, or $30.42 per share.
From January 1, 2001 through March 15, 2001, we funded $34 million of
commitments made prior to December 31, 2000. Additionally, from January 1, 2001
through March 15, 2001, we committed $7 million and funded $4 million to acquire
ownership interests in or make advances to affiliates. In January 2001, we
completed the acquisition of 100% of Palarco, Inc., a provider of global
information technology solutions. In January 2001, CompuCom purchased certain
assets of MicroAge Technology Services, L.L.C.
Our general operations are not capital intensive, and capital expenditures in
any year normally will not be significant in relation to our overall financial
position. There were no material capital asset purchase commitments at December
31, 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", as amended. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statements of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
If the derivative is determined to be a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are offset against the change in
fair value of the hedged assets, liabilities or firm commitments through the
statements of operations or recognized in other comprehensive income until the
hedged item is recognized in the statements of operations. The ineffective
portion of a derivative's change in fair value is immediately recognized in
earnings. We are required to adopt SFAS 133 on January 1, 2001. We currently
hold derivative instruments and engage in certain hedging activities, which have
been accounted for as described in note 6 to the consolidated financial
statements. We account for the forward sale contracts as hedges and have
determined that the hedges are highly effective, as changes in the value of the
hedge are substantially offset by changes in the value of the underlying
securities. Certain of our affiliates also hold derivative financial
instruments as defined by SFAS 133.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". We adopted the disclosure
provisions of SFAS No. 140 during 2000. We do not expect the adoption of the
accounting provisions of SFAS No. 140 to have a material impact on our financial
condition or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to equity price risks on the marketable portion of our
securities. These securities include equity positions in companies in the
technology industry, many of which have experienced significant volatility in
their stock prices. Historically, we have not attempted to reduce or eliminate
our market exposure on securities (except the Tellabs transactions as described
below). Based on closing market prices at December 31, 2000, the fair market
value of our holdings in public securities was approximately $414 million
(excluding our holdings in Tellabs). Approximately $121 million of these equity
securities at December 31, 2000 consisted of our holdings in Internet Capital
Group. A 20% decrease in equity prices would result in an approximate $83
million decrease in the fair value of our publicly traded securities.
In 1999, we entered into two forward sale contracts related to our remaining
holdings in Tellabs. We pledged 3.4 million shares of Tellabs for three years
and in return received approximately $139 million in cash. At the end of the
term, we have the option to deliver cash or Tellabs shares with a value
determined by the stock price of Tellabs at maturity. The number of Tellabs
shares to be delivered at maturity ranges from 2.7 million to 3.4 million shares
(or the cash value thereof).
Availability under our bank credit facilities is determined by the market
value of our pledged securities. Availability under our credit facility at
December 31, 2000 was $118 million. Additionally, we are exposed to interest
rate risk primarily through our bank credit facility. At December 31, 2000,
there were no borrowings outstanding.
CompuCom is exposed to interest rate risk primarily through its receivables
securitization and working capital facilities. CompuCom utilizes borrowings on
these facilities to meet its working capital needs and other financing needs. At
December 31, 2000, the securitization facility had borrowings of approximately
$150 million, and there
were no borrowings on the working capital facility. If CompuCom's effective
interest rate were to increase 75 basis points, or 0.75%, CompuCom's interest
expense would increase by approximately $1.6 million based on CompuCom's average
borrowings during 2000. Our share of this increase would be approximately $0.8
million after deduction for minority interest but before income taxes.
Factors That May Affect Future Results
We operate in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. Forward-looking statements in this report
and those made from time to time by us through our senior management are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Factors that could cause actual results to differ materially
from results anticipated in forward-looking statements are described in our SEC
filings, including our Annual Report on Form 10-K for the year ended December
31, 2000. These factors include, but are not limited to, the following:
. Industry-specific conditions affecting the infrastructure technology
business sector in which many of our affiliates operate, such as intense
competition, rapid changes in technology and customer demands, frequent new
product introductions and shifting distribution channels.
. Many of our affiliates are early-stage companies with limited operating
histories, no historical profits and financing requirements that they may
not be able to satisfy. These affiliates may not have operating income or
net income in the future and their financial results may vary dramatically
from quarter to quarter.
. We may have problems raising money we need in the future to fund the needs
of our affiliates and to make acquisitions of affiliates.
. We may incur significant costs to avoid investment company status and may
suffer adverse consequences if deemed to be an investment company.
. Our strategy of selling assets of our interests in some of the affiliates
that we have acquired and developed is dependent on the strength of the
public equity market and on the level of activity in the mergers and
acquisitions market in the affiliate's industry, as well as on the
requirements of the Federal securities laws regulating the sale of
securities.
. Our financial results are likely to vary dramatically from quarter to
quarter depending upon various events. These events include the financial
results of our affiliates and the way that the partner companies are
reflected in our consolidated financial statements, sales of partner
companies or our interests in partner companies and distributions from
private equity funds which we manage or in which we have an interest.
. Our stock price may be subject to significant fluctuation because the value
of some of our partner companies fluctuates and because of market conditions
generally.
MARKET FOR COMMON STOCK AND RELATED FINANCIAL MATTERS
The Company's common stock is listed on the New York Stock Exchange (Symbol:
SFE). The high and low sale prices reported within each quarter of 2000 and 1999
are as follows:
High Low
--------------------------------------------------
Fiscal year 2000:
First quarter $99.00 $43.71
Second quarter 68.38 29.00
Third quarter 39.69 18.69
Fourth quarter 21.44 4.50
Fiscal year 1999:
First quarter $24.63 $ 9.17
Second quarter 40.00 19.13
Third quarter 25.50 15.85
Fourth quarter 61.81 22.63
The high and low sale prices reported in 2001 through March 15 were $12.81
and $5.59, respectively, and the last sale price reported on March 15, 2001, was
$5.59. No cash dividends have been declared in any of the years presented, and
the Company has no present intention to declare cash dividends.
As of March 15, 2001, there were approximately 105,000 beneficial holders of
the Company's common stock.
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
December 31 2000 1999
- -------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents, restricted cash and short-term investments $ 219,431 $ 49,813
Accounts receivable, less allowances ($4,328-2000; $5,604-1999) 246,949 259,383
Inventories 78,187 129,826
Prepaid expenses and other current assets 28,360 16,488
- -------------------------------------------------------------------------------------------------
Total current assets 572,927 455,510
Property and equipment, net 52,951 56,234
Ownership interests in and advances to affiliates 616,875 529,381
Available-for-sale securities 214,343 302,940
Intangibles, net 123,002 119,288
Deferred taxes 39,708 --
Other 28,453 36,526
- -------------------------------------------------------------------------------------------------
Total Assets $1,648,259 $1,499,879
- -------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 5,250 $ 11,019
Accounts payable 123,130 183,781
Accrued expenses 130,722 126,871
- -------------------------------------------------------------------------------------------------
Total current liabilities 259,102 321,671
Long-term debt 13,493 14,532
Deferred taxes -- 110,556
Minority interest 106,462 102,808
Other long-term liabilities 164,765 175,611
Convertible subordinated notes 200,000 200,000
Commitments and contingencies
Shareholders' Equity
Preferred stock, $10.00 par value; 1,000 shares authorized -- --
Common stock, $0.10 par value; 500,000 shares authorized;
118,154 and 104,749 shares issued and outstanding in
2000 and 1999, respectively 11,815 10,475
Additional paid-in capital 758,946 133,969
Retained earnings 172,716 385,120
Accumulated other comprehensive income (loss) (712) 45,137
Treasury stock, at cost (1,267 shares in 2000) (38,328) --
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 904,437 574,701
- -------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,648,259 $1,499,879
- -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------
Revenue
Product sales $2,457,572 $2,661,498 $2,022,131
Service sales 290,510 318,234 280,178
Other 22,299 13,912 11,949
- --------------------------------------------------------------------------------
Total revenue 2,770,381 2,993,644 2,314,258
Operating Expenses
Cost of sales-product 2,257,624 2,434,068 1,813,282
Cost of sales-service 184,218 207,208 185,561
Selling and service 150,351 165,036 167,715
General and administrative 199,206 151,447 102,535
Depreciation and amortization 33,462 30,528 21,738
Restructuring 5,417 387 16,437
- --------------------------------------------------------------------------------
Total operating expenses 2,830,278 2,988,674 2,307,268
- --------------------------------------------------------------------------------
(59,897) 4,970 6,990
Gains on issuance of stock by affiliates -- 175,662 3,782
Other income, net 93,105 128,404 208,697
Interest income 18,097 4,839 2,742
Interest and financing expense (41,897) (41,807) (29,720)
Income Before Income Taxes, Minority
Interest and Equity Loss 9,408 272,068 192,491
Income taxes 100,323 (66,514) (61,424)
Minority interest (2,213) (8,936) (47)
Equity loss (319,922) (73,092) (20,897)
- --------------------------------------------------------------------------------
Net Income (Loss) $ (212,404) $ 123,526 $ 110,123
- --------------------------------------------------------------------------------
Net Income (Loss) Per Share
Basic $ (1.86) $ 1.22 $ 1.15
Diluted $ (1.87) $ 1.16 $ 1.07
Weighted Average Shares Outstanding
Basic 114,068 101,134 95,499
Diluted 114,068 110,910 104,742
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Other
Common Stock Additional Comprehensive Treasury Stock
------------ Paid-In Retained Income --------------
Shares Amount Capital Earnings (Loss) Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 98,398 $ 9,840 $ 43,392 $ 151,471 $ 15,706 4,691 $(13,339) $ 207,070
Net income 110,123 110,123
Stock options exercised, net (1,935) (1,205) 4,201 2,266
Tax benefit of stock option exercises 1,869 1,869
Repurchase of common stock 2,295 (18,672) (18,672)
Conversion of convertible
subordinated notes 13,189 (2,022) 6,031 19,220
Subsidiaries' equity transactions (605) (605)
Other comprehensive income 21,588 21,588
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 98,398 9,840 55,910 261,594 37,294 3,759 (21,779) 342,859
Net income 123,526 123,526
Stock options exercised, net 736 74 1,700 (816) 6,136 7,910
Tax benefit of stock option exercises 7,051 7,051
Issuance of common stock
for acquisition 8,781 (1,324) 7,721 16,502
Repurchase of common stock 150 (2,695) (2,695)
Conversion of convertible
subordinated notes 5,615 561 60,384 (1,769) 10,617 71,562
Subsidiaries' equity transactions 143 143
Other comprehensive income 7,843 7,843
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 104,749 10,475 133,969 385,120 45,137 -- -- 574,701
Net loss (212,404) (212,404)
Issuance of common stock, net 12,807 1,280 611,460 612,740
Stock options exercised, net 363 36 (3,320) (174) 5,515 2,231
Tax benefit of stock option exercises 4,099 4,099
Issuance of common stock
for acquisitions 160 16 6,874 (87) 2,643 9,533
Repurchase of common stock 1,528 (46,486) (46,486)
Other 75 8 5,864 5,872
Other comprehensive loss (45,849) (45,849)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 118,154 $11,815 $758,946 $ 172,716 $ (712) 1,267 $(38,328) $ 904,437
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(212,404) $ 123,526 $ 110,123
- -------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss),
Before Taxes:
Unrealized holding gains (losses) (33,120) 59,631 43,676
Reclassification adjustments (37,416) (47,565) (10,103)
Related Tax (Expense) Benefit:
Unrealized holding (gains) losses 11,591 (20,871) (15,591)
Reclassification adjustments 13,096 16,648 3,606
- -------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (45,849) 7,843 21,588
- -------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $(258,253) $ 131,369 $ 131,711
- -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (212,404) $ 123,526 $ 110,123
Adjustments to reconcile to net cash provided by (used in)
operating activities:
Depreciation and amortization 33,462 30,528 21,738
Deferred income taxes (128,191) 45,397 28,909
Equity loss 319,922 73,092 20,897
Gains on issuance of stock by affiliates -- (175,662) (3,782)
Other income, net (93,105) (128,404) (208,697)
Stock-based compensation 12,603 434 --
Tax benefit of stock option exercises (4,099) (7,051) (1,869)
Minority interest 1,328 5,151 28
Changes in assets and liabilities, net of effect of acquisitions
and dispositions:
Accounts receivable, net (1,960) 41,595 (32,301)
Inventories 51,639 102,922 68,840
Accounts payable, accrued expenses and other (46,016) 16,819 73,051
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (66,821) 128,347 76,937
Investing Activities
Proceeds from sales of available-for-sale securities 98,649 53,565 3,319
Proceeds from sales of and distributions from affiliates 77,079 84,522 91,519
Advances to affiliates (32,293) (56,417) (32,161)
Repayment of advances to affiliates 15,550 8,150 7,689
Acquisitions of ownership interests in affiliates
and subsidiaries, net of cash acquired (478,729) (212,294) (112,903)
Acquisitions by subsidiaries, net of cash acquired (750) (141,253) (49,679)
Increase in short-term investments and restricted cash (86,230) -- --
Proceeds from sale of building 617 45,466 --
Capital expenditures (15,511) (10,191) (17,582)
Other, net 1,044 (7,931) (1,988)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (420,574) (236,383) (111,786)
Financing Activities
Borrowings on revolving credit facilities 1,301,001 1,181,552 796,257
Repayments on revolving credit facilities (1,301,857) (1,342,272) (743,503)
Borrowings on long-term debt 2,981 -- 909
Repayments on long-term debt (2,726) (28,295) (3,178)
Proceeds from issuance of convertible subordinated notes -- 200,000 --
Payment of financing costs on convertible subordinated notes -- (6,178) --
Proceeds from financial instruments -- 139,309 --
Repurchase of Company common stock (46,486) (2,695) (18,672)
Issuance of Company common stock, net 614,971 7,910 2,266
Issuance of subsidiary common stock 2,899 2,261 1,645
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 570,783 151,592 35,724
- ---------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 83,388 43,556 875
Cash and cash equivalents at beginning of period 49,813 6,257 5,382
- ---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 133,201 $ 49,813 $ 6,257
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
SAFEGUARD SCIENTIFICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Description of the Company
Safeguard Scientifics, Inc. (Safeguard or the Company) is a leader in
identifying, developing and operating emerging technology companies through our
extensive network of partner companies and private equity funds. The Company
acquires interests in developing infrastructure technology companies,
accelerates their growth and integrates these companies into our network. The
Company focuses on what it believes to be the most significant market sectors of
the infrastructure technology industry: software, communications and e-Services.
The Company believes its experience developing and operating technology
companies, its expertise in and focus on infrastructure technology and the reach
of its network enable it to identify and grow companies with significant
potential for success in the infrastructure technology market.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries, including CompuCom Systems, Inc. (CompuCom),
Tangram Enterprise Solutions, Inc. (Tangram), aligne, incorporated (aligne) and
SOTAS, Inc. (SOTAS). Arista Knowledge Systems, Inc. (Arista) was consolidated
prior to its sale in July 2000. In 1997, the Company established limited
partnerships to hold its ownership interests in affiliates. The Company
allocates 10.0% to 15.0% interest in these partnerships for purchase by Company
employees. The Company is the sole general partner and retains the remaining
interest. Distributions to limited partners are subject to the achievement of
certain thresholds.
Principles of Accounting for Ownership Interests in Affiliates
The Company's ownership interests in its partner companies and private equity
funds are accounted for under three broad methods: consolidation, equity and
cost. The applicable accounting method is generally determined based on the
Company's voting interest in the entity.
Consolidation Method. Partner companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are
accounted for under the consolidation method of accounting. If this majority
ownership is likely to be temporary, the Company accounts for the company under
the equity method. Under the consolidation method, a partner company's results
of operations are included within the Company's consolidated statements of
operations. All significant intercompany accounts and transactions have been
eliminated. Participation of other partner company shareholders in the income or
losses of a consolidated partner company is reflected in minority interest in
the consolidated statements of operations.
Equity Method. Partner companies whose results are not consolidated, but over
whom the Company exercises significant influence, or for whom majority voting
ownership is likely to be temporary, are accounted for under the equity method
of accounting. Whether or not the Company exercises significant influence with
respect to a partner company depends on an evaluation of several factors
including, among others, representation on the partner company's Board of
Directors and ownership level, which is generally a 20% to 50% interest in the
voting securities of the partner company, including voting rights associated
with the Company's holdings in common, preferred and other convertible
instruments in the partner company. Under the equity method of accounting, a
partner company's results of operations are not reflected within the Company's
consolidated statements of operations; however, the Company's share of the
income or losses of the partner company is reflected in equity income (loss) in
the consolidated statements of operations. The Company's carrying value for a
partner company accounted for under the equity method includes the unamortized
excess of the cost of the Company's interest in the partner company over its
equity in the underlying net assets determined at the date of acquisition. This
excess is amortized on a straight-line basis generally over a 3 to 10 year
period and is included in equity income (loss) in the consolidated statements of
operations. The Company also accounts for its interests in some private equity
funds under the equity method of accounting, based on its respective general and
limited partner interests.
At the time an affiliate accounted for under the equity method sells its stock
to unrelated parties at a price in excess of its book value, the Company's net
investment in that affiliate increases. At that time, the Company records the
increase as a gain in its consolidated statements of operations unless the
affiliate is a newly-formed, non-operating entity or a research and development,
start-up or development stage company; there is question as to the affiliate's
ability to continue in existence; or the Company is contemplating subsequent
capital transactions that may impact the ultimate realization of the gain.
Cost Method. Partner companies and private equity funds not consolidated or
accounted for under the equity method are accounted for under the cost method of
accounting. Under the cost method, the Company's share of the income or losses
of such entities is not included in the Company's consolidated statements of
operations.
The Company periodically evaluates the carrying value of its ownership
interests in each affiliate for possible impairment based on achievement of
business plan objectives and milestones, the value of each ownership interest in
the affiliate relative to its carrying value, the financial condition and
prospects of the affiliate and other relevant factors. The business plan
objectives and milestones the Company considers include, among others, those
related to financial performance, such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature, such as hiring of key employees or the
establishment of strategic relationships. Management then determines whether
there has been an other than temporary decline in the carrying value of its
ownership interest in the affiliate. Impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Impairment charges are recognized in the consolidated statements of
operations. The new cost basis of an affiliate is not written-up if
circumstances suggest the value of the partner company has subsequently
recovered.
Cash and Cash Equivalents, Restricted Cash and Short-Term Investments
The Company considers all highly liquid instruments with an original maturity of
90 days or less at the time of purchase to be cash equivalents. At December 31,
2000, cash and cash equivalents consist of commercial paper and other deposits
that are readily convertible into cash. Restricted cash of $35 million is
primarily invested in money market instruments and is used as collateral under a
guarantee arrangement (note 16). Short-term investments of $51 million represent
commercial paper with original maturities ranging from 92 to 208 days.
Marketable Securities
Marketable securities consist of common stock held in publicly traded companies.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date. All marketable
securities are defined as trading securities or available-for-sale securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its holdings in
marketable securities at the time of purchase and reevaluates such determination
at each balance sheet date. Available-for-sale securities are carried at fair
value, based on quoted market prices, with the unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity. Trading
securities are carried at fair value, based on quoted market prices, with the
unrealized net gain or loss included in other income, net in the consolidated
statements of operations.
Receivables Securitization
CompuCom has an agreement with a financial institution that allows CompuCom to
sell, without recourse, and on a revolving basis, an interest in a portion of
its accounts receivable. Sales of receivables are reflected as a reduction in
accounts receivable, less allowances on the consolidated balance sheet. CompuCom
is retained as servicer of the receivables; however, the cost to service the
receivables is not material.
Financial Instruments
The Company's financial instruments, principally cash and cash equivalents,
restricted cash, short-term investments, accounts receivable, accounts payable
and accrued expenses, are carried at cost which approximates fair value due to
the short-term maturity of these instruments. The Company's long-term debt is
carried at cost which approximates fair value as the debt bears interest at
rates approximating current market rates. The fair value of the Company's
forward sales contracts on its Tellabs holdings is $163 million, based on the
amount the Company would have to pay to terminate these
contracts. At December 31, 2000, the market value of the Company's convertible
subordinated notes was approximately $98 million based on quoted market prices.
The Company may selectively enter into agreements to reduce the impact of
stock market volatility on its ownership in publicly traded companies. These may
include agreements to protect against a possible decline in the market value of
the particular company. The Company does not enter into agreements for trading
or speculative purposes. The counter parties to these agreements are major
financial institutions.
Inventories
Inventory consists primarily of product inventory held by CompuCom. Inventory is
stated at the lower of average cost or market. The Company continually assesses
the appropriateness of the inventory valuations considering obsolete, slow-
moving and non-salable inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Provision for depreciation and amortization is based on the
estimated useful lives of the assets (buildings and leasehold improvements, 3 to
40 years; machinery and equipment, 3 to 12 years) and is computed using the
straight-line method.
Intangibles
Goodwill is amortized on a straight-line basis over its estimated useful life,
principally over 3 to 20 years. Accumulated amortization at December 31, 2000
and 1999, was $47.2 million and $40.8 million, respectively. The Company
periodically evaluates the recoverability of goodwill by estimating the future
undiscounted cash flows from the related business activities (including possible
proceeds from a sale of the business). When estimated future undiscounted cash
flows are less than the carrying value of the net assets and related goodwill,
impairment losses of goodwill are charged to operations.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to forecasted undiscounted cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Revenue Recognition
Product revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed and determinable and
collectibility is probable. Generally, these criteria are met at the time of
shipment. Provision is made at the time the related revenue is recognized for
estimated product returns, which historically have been immaterial. Revenue
earned from services is recognized ratably over the contractual period or as
services are performed. Shipping and handling revenues are included in product
revenues and costs are included in product costs.
CompuCom derives software revenues in connection with the sale of personal
computers with standard installed software packages. These revenues are
recognized as a component of product revenues as computers are shipped. Tangram
and SOTAS recognize revenue from software licenses, post contract customer
support (PCS) and related consulting services. Revenue from software license
agreements and product sales are recognized upon delivery, provided that all of
the following conditions are met: a non-cancelable license agreement has been
signed; the software has been delivered; no significant production, modification
or customization of the software is required; the vendor's fee is fixed or
determinable; and collection of the resulting receivable is deemed probable. In
software arrangements that include rights to software products, specified
upgrades or gateways, PCS and/or other services, the companies allocate the
total arrangement fee among each deliverable based on vendor-specific objective
evidence. Revenue from maintenance agreements is recognized ratably over the
term of the maintenance period, generally one year. Consulting and training
services, which are not considered essential to the functionality of the
software products, are recognized as the respective services are performed.
Consulting fee revenue (classified as service revenue) is recognized in the
period in which services are performed and include all amounts that are billed
or billable to clients.
Vendor Programs
CompuCom receives volume incentives and rebates from certain manufacturers
related to sales of certain products which are recorded as a reduction of cost
of sales when earned. CompuCom also receives manufacturer reimbursements for
certain training, promotional and marketing activities that offset the expenses
incurred by CompuCom.
Interest and Financing Expense
Interest and financing expense consist of interest incurred on borrowings by the
Company and its subsidiaries, and discounts on the sale of receivables by
CompuCom.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) for stock options and other stock-based
awards while disclosing pro forma net income and net income per share as if the
fair value method had been applied in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
Gains or Losses on Issuance of Stock by Subsidiaries
At the time a consolidated partner company sells its common stock at a price
different from the Company's book value per share, the Company's share of the
partner company's net equity changes. If at that time, the partner company is
not a newly-formed, non-operating entity, nor a research and development, start-
up or development stage company, nor is there question as to the partner
company's ability to continue in existence, the Company records the change in
its share of the partner company's net equity as a gain or loss in its
consolidated statements of operations (note 12). Otherwise, the increase for
issuances of stock is reflected in subsidiaries' equity transactions in the
consolidated statements of shareholders' equity.
If gains have been recognized on issuances of a subsidiary's stock and shares
of the subsidiary are subsequently repurchased by the subsidiary or by the
Company, gain recognition does not occur on issuances subsequent to the date of
a repurchase until such time as shares have been issued in an amount equivalent
to the number of repurchased shares. Such transactions are reflected as equity
transactions, and the net effect of these transactions is reflected in the
consolidated statements of shareholders' equity.
Defined Contribution Plans
Defined contribution plans are contributory and cover eligible employees of the
Company and certain subsidiaries. The Company and certain subsidiaries generally
match from 50% to 100% of the first 3% to 6% of employee contributions to these
plans. Additionally, the Company makes annual discretionary contributions to a
defined contribution pension plan based on 3.5% to 4.5% of a participant's
eligible compensation. Amounts expensed relating to these plans were $3.7
million, $3.1 million and $2.7 million in 2000, 1999 and 1998, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method whereby
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Net Income (Loss) Per Share
Net income (loss) per share (EPS) is computed on net income (loss) using the
weighted average number of common shares outstanding during each year. Diluted
EPS includes common stock equivalents (unless anti-dilutive) which would arise
from the exercise of stock options and conversion of other convertible
securities and is adjusted, if applicable, for the effect on net income of such
transactions. Diluted EPS calculations adjust net income (loss) for the dilutive
effect of common stock equivalents and convertible securities issued by the
Company's public subsidiaries or equity affiliates.
Common Stock
On February 28, 2000, the Board of Directors approved a three-for-one stock
split to the Company's shareholders of record on March 13, 2000. All share and
per share data have been restated to reflect a three-for-one split of the
Company's common stock as if the stock split had occurred as of December 31,
1997.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from non-
owner sources. Excluding net income (loss), the Company's source of other
comprehensive income (loss) is from net unrealized appreciation (depreciation)
on its holdings classified as available-for-sale. Reclassification adjustments
result from the recognition in net income (loss) of unrealized gains or losses
that were included in comprehensive income (loss) in prior periods.
Segment Information
The Company reports segment data based on the management approach which
designates the internal reporting which is used by management for making
operating decisions and assessing performance as the source of the company's
reportable operating segments.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", as amended. SFAS 133 establishes new
standards of accounting and reporting for derivative instruments and hedging
activities. SFAS 133 requires that all derivatives be recognized at fair value
in the statement of financial position, and that the corresponding gains or
losses be reported either in the statements of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
If the derivative is determined to be a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are offset against the change in
fair value of the hedged assets, liabilities or firm commitments through the
statements of operations or recognized in other comprehensive income until the
hedged item is recognized in the statements of operations. The ineffective
portion of a derivative's change in fair value is immediately recognized in
earnings. The Company is required to adopt SFAS 133 on January 1, 2001. The
Company currently holds derivative instruments and engages in certain hedging
activities, which have been accounted for as described in note 6. The Company
accounts for the forward sale contracts as hedges and has determined that the
hedges are highly effective, as changes in the value of the hedge are
substantially offset by changes in the value of the underlying securities.
The Company does not expect the adoption of other recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flows.
2. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31 2000 1999
- --------------------------------------------------------------------
Land, building and
improvements $ 36,248 $ 36,642
Machinery and equipment 78,641 67,904
- --------------------------------------------------------------------
114,889 104,546
Accumulated depreciation and
amortization (61,938) (48,312)
- --------------------------------------------------------------------
$ 52,951 $ 56,234
- --------------------------------------------------------------------
In 1999, CompuCom sold its corporate headquarters building in a sale/leaseback
transaction for approximately $40 million. The proceeds from the sale were used
to pay down CompuCom's long-term debt. As part of the transaction, CompuCom
entered into a 20-year operating lease on the building.
3. Business Combinations
Acquisitions by the Company
In August 2000, the Company's wholly owned subsidiary, aligne, acquired 100% of
K Consultants for a total of $7.5 million in cash. The terms of the agreement
provide for additional consideration to be paid if K Consultants' results of
operations exceed certain targeted thresholds. The maximum amount of contingent
consideration is $7.5 million (payable in 2001). The contingent consideration
will be recorded when earned as additional purchase price. K Consultants
provides e-Business infrastructure consulting services, including strategy,
architecture, implementation and support.
In February 1999, the Company acquired an 80% voting ownership in aligne in
exchange for 1.3
million shares of the Company's common stock with a market value of $16.5
million at the date of acquisition. In February 2000, the Company acquired the
remaining 20% voting ownership in aligne in exchange for 160,434 shares of the
Company's common stock with a market value of $8.2 million at the date of
acquisition. In June 1999, the Company acquired a 75% voting ownership in SOTAS
for $11.4 million and assumed certain liabilities.
Acquisitions by Subsidiaries
In May 1999, CompuCom purchased from ENTEX Information Services, Inc. certain
assets of its Technology Acquisition Services Division in a cash transaction.
This acquisition was structured as an asset purchase. Under the terms of the
agreement, CompuCom paid approximately $137 million and assumed certain
liabilities for the acquired assets, which consisted primarily of inventory,
certain fixed assets and the Erlanger, Kentucky distribution center.
The transactions were all accounted for as purchases and, accordingly, the
consolidated financial statements reflect the operations of these companies
since the dates of acquisition. The Company and its subsidiaries allocated the
purchase price to the assets and liabilities acquired based on the estimated
fair value as of the date of acquisition. The acquisitions resulted in goodwill
of $78 million which is being amortized over periods ranging from 8 to 20 years.
The following unaudited pro forma financial information (in thousands except
per share amounts) presents the combined results of operations of the Company as
if the 1999 acquisitions had occurred as of January 1, 1998, after giving effect
to certain adjustments, including amortization of goodwill, increased interest
expense on debt related to the acquisitions and related income tax effects. The
pro forma results of operations are not indicative of the actual results that
would have occurred had the acquisitions been consummated at the beginning of
the period presented and are not intended to be a projection of future results.
Year ended
December 31, 1999
- -------------------------------------------------------
Total revenues $3,621,147
Net earnings $ 115,881
Diluted earnings per share $ 1.15
4. Available-for-Sale Securities
Available-for-sale securities consisted of the following (in thousands)
December 31 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Carrying Market Carrying Market
Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------
Tellabs $212,731 $190,654(b) $212,731 $216,595
Diamond Technology Partners -- -- 710 57,436
Pac-West Telecomm 9,872 8,465 --(a) --(a)
Brandywine Realty Trust 8,561 10,619 8,561 8,177
Other public companies 2,086 4,605 17,052 20,732
Unrealized appreciation (depreciation) (18,907) 63,886
- -----------------------------------------------------------------------------------------------------------------
$214,343 $302,940
- -----------------------------------------------------------------------------------------------------------------
(a) These holdings were included in "ownership interests in and advances to
affiliates" at December 31, 1999 since they were accounted for on the
equity method.
(b) As discussed in note 6, the Company entered into forward sales contracts on
its Tellabs holdings in 1999.
5. Ownership Interests in and Advances to Affiliates
The following summarizes the Company's ownership interests in and advances to
affiliates accounted for under the equity method or cost method of accounting
(in thousands). The ownership interests are classified according to applicable
accounting methods at December 31, 2000 and 1999. Market value reflects the
price of publicly traded holdings at the close of business at the respective
date.
December 31 2000 1999
- --------------------------------------------------------------------------------------------
Carrying Market Voting Carrying Market
Value Value Interest Value Value
- --------------------------------------------------------------------------------------------
Equity Method
Cambridge Technology Partners $ 47,815 $ 27,031 17% $ 49,181 $ 254,556
ChromaVision Medical Systems 14,372 15,990 30% 13,626 81,201
DocuCorp International 10,145 5,864 18% 9,995 22,249
eMerge Interactive 27,486 27,047 17% 7,201 --(a)
Internet Capital Group 136,479 120,943 14% 189,068 6,169,208
Lifef/x (1,001) 78,229 12% -- 86,823(c)
OAO Technology Solutions 17,135 6,983 31% 16,448 42,853
Pac-West Telecomm --(b) --(b) --(b) 7,613 62,943
Sanchez Computer Associates 9,981 51,878 25% 11,686 258,995
USDATA Corporation 4,650 4,650 40% 15,920 82,406
US Interactive --(b) --(b) --(b) 9,769 107,795
Non-public affiliates 309,369 162,130
- --------------------------------------------------------------------------------------------
576,431 492,637
Cost Method
Non-public companies 33,101 16,266
Advances to Affiliates 7,343 20,478
- --------------------------------------------------------------------------------------------
$616,875 $529,381
- --------------------------------------------------------------------------------------------
(a) eMerge Interactive was not publicly traded until 2000.
(b) Pac-West Telecomm and US Interactive are now accounted for as available-
for-sale securities as a result of a decrease in the Company's ownership
during 2000.
(c) Excludes the market value of warrants that were not exercisable at December
31, 1999.
Technology-related stocks have experienced significant volatility. For
example, based on the high and low stock prices in 2000, the market value of the
Company's holdings in Internet Capital Group has ranged from $7.3 billion to
$101.4 million.
As of December 31, 2000 and 1999, the Company had advances to partner
companies which mature on various dates through May 2004 and bear interest at
fixed rates between 5.3% and 9.0% and variable rates consisting of the prime
rate (9.5% at December 31, 2000) plus 1%. Additionally, the Company had short-
term advances to partner companies of $15 million at December 31, 1999, which is
included in accounts receivable, less allowances on the consolidated balance
sheets.
At December 31, 2000 and 1999, the Company's carrying value in its partner
companies accounted for under the equity method exceeded its share of the
underlying equity in the net assets of such companies by $128 million and $99
million, respectively, which is included in ownership interests in and advances
to affiliates in the consolidated balance sheets. This excess relates to
ownership interests acquired through December 31, 2000 and is being amortized
over a 3 to 10 year period. Amortization expense of $28.2 million, $9.5 million
and $3.3 million, is included in equity loss in the consolidated statements of
operations for the years ended December 31, 2000, 1999 and 1998, respectively.
During management's ongoing review of the recoverability of recorded carrying
values versus fair
value, it was determined that the carrying value of goodwill and certain other
intangible assets were not fully recoverable. In 2000, 1999 and 1998, the
Company recorded impairment charges totaling $129.0 million, $12.7 million and
$14.2 million, respectively, for companies accounted for under the equity
method. Each of the affiliates for which impairment charges were recorded have
experienced declines in operating and financial metrics in comparison to the
metrics forecasted at the time of their respective acquisitions. The amount of
the impairment charge was determined by comparing the carrying value of the
affiliate to the estimated fair value.
The following unaudited summarized financial information for partner companies
accounted for under the equity method at December 31, 2000, 1999, and 1998 has
been compiled from the unaudited financial statements of the respective partner
companies and reflects certain historical adjustments (in thousands). Revenue
and net income of a partner company are excluded for periods prior to the year
of acquisition.
December 31 2000 1999
- -----------------------------------------------------------------------
Balance Sheets
Current assets $1,283,334 $2,148,361
Non-current assets 3,267,580 1,006,726
- -----------------------------------------------------------------------
Total assets $4,550,914 $3,155,087
- -----------------------------------------------------------------------
Current Liabilities $ 436,951 $ 348,995
Non-current liabilities 1,000,174 740,983
Shareholders' equity 3,113,789 2,065,109
- -----------------------------------------------------------------------
Total liabilities and
shareholders' equity $4,550,914 $3,155,087
- -----------------------------------------------------------------------
Year Ended
December 31 2000 1999 1998
- -----------------------------------------------------------------------
Results of Operations
Revenue:
Public companies $1,721,740 $1,074,315 $792,320
Non-public
companies 132,633 135,262 49,734
- -----------------------------------------------------------------------
$1,854,373 $1,209,577 $842,054
- -----------------------------------------------------------------------
Net income (loss) $ (500,808) $ (185,748) $ 7,503
- -----------------------------------------------------------------------
6. Financial Instruments
In 1999, in order to mitigate the Company's market exposure and generate cash
from holdings in Tellabs, the Company entered into two forward sale contracts
related to 3.4 million shares of its holdings in Tellabs. The Company pledged
these shares of Tellabs under contracts that expire in 2002 and, in return,
received approximately $139 million of cash. At maturity, the Company is
required to deliver cash or Tellabs stock with a value determined by the stock
price of Tellabs at maturity. The number of Tellabs shares to be delivered at
maturity will range between 2.7 million to 3.4 million depending on the price of
Tellabs stock at that date.
The Company's liability of $163 million in connection with these transactions
is included in other long-term liabilities on the consolidated balance sheet of
December 31, 2000. These liabilities are carried at fair value, based on quoted
market prices, with the unrealized gains and losses, net of tax, reported as a
separate component of shareholders' equity. The initial cost of the transaction
($4.3 million) is being amortized as an adjustment of yield over the life of the
agreement through the statements of operations.
The Company's holdings in Tellabs are included in available-for-sale
securities on the consolidated balance sheet. These securities are carried at
fair value, based on quoted market prices, with the unrealized gains and losses,
net of tax, reported as a separate component of shareholders' equity.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. The risk of loss to the Company in
the event of nonperformance by the counterpart under the forward sale contracts
is not considered to be significant. Although the forward sale contracts expose
the Company to market risk, fluctuations in the fair value of these contracts
are mitigated by expected offsetting fluctuations in the pledged securities.
7. Long-term Debt
The following is a summary of long-term debt (in thousands):
December 31 2000 1999
- -------------------------------------------------------------------------
Parent company and other recourse debt $18,240 $ 25,325
Subsidiary debt (non-recourse to parent) 503 226
- -------------------------------------------------------------------------
Total debt 18,743 25,551
Current maturities of long-term debt (5,250) (11,019)
- -------------------------------------------------------------------------
Long-term debt $13,493 $ 14,532
- -------------------------------------------------------------------------
In April 2000, the Company increased the availability under the bank revolving
credit facilities to $300 million from $200 million. Of the $300 million, $250
million matures in April 2005 and is secured by certain equity securities the
Company holds of its publicly traded partner companies (the Pledged Securities).
The remaining $50 million is unsecured, with availability limited to the lesser
of $50 million or 10% of the value of the Pledged Securities. The $50 million
facility matures in April 2001. The bank revolving credit facilities bear
interest at the prime rate and/or, at the Company's option, at LIBOR
(approximately 6.56% at December 31, 2000) plus 1.25% and are subject to a
commitment fee ranging from 0.3% to 0.4% on the unused portion. Availability
under the Company's bank credit facilities is determined by the market value of
the pledged securities. Availability under the Company's credit facilities at
December 31, 2000 was $118.3 million, and there were no amounts outstanding. The
Company borrowed a maximum of $52.0 million and $146.6 million during 2000 and
1999, respectively.
The credit facilities require, among other things, the maintenance of
specified levels of tangible net worth, debt to tangible net worth, specified
interest coverage ratios and limitations on the amount available for
acquisitions and dividends. At December 31, 2000, the Company was not in
compliance with a financial covenant under its credit facilities. In 2001, the
Company's bank group waived this covenant through March 30, 2001, and the
Company agreed that the pledged securities will also collateralize the $50
million facility. Unless the Company's bank group extends this waiver beyond
March 30, 2001, the Company will not be able to make draws under its existing
credit facilities. The Company is currently negotiating a new credit facility
totaling $100 million, but there can be no assurance that the Company will be
able to complete this agreement.
Other long-term debt includes mortgage obligations and bank credit facilities
of consolidated partner companies. These obligations bear interest at rates
ranging from 7.75% to 9.75%.
At December 31, 2000, CompuCom has a $100 million working capital facility and
a $150 million receivables securitization facility. Consistent with CompuCom's
financing requirements, during 2000 CompuCom reduced the securitization facility
from $275 million to $150 million and the working capital facility was reduced
from $200 million to $100 million. The $100 million working capital facility
bears interest at a rate of LIBOR plus an agreed upon spread and is secured by
certain assets of CompuCom. Availability under this facility is subject to a
borrowing base calculation. As of December 31, 2000, availability under the
working capital facility was approximately $76.2 million, and there were no
amounts outstanding as of December 31, 2000 and 1999. The working capital
facility matures in May 2002. The securitization facility allows CompuCom to
sell, without recourse, an interest in its accounts receivable on a revolving
basis and is accounted for as a sale of accounts receivable. The effective rate
on the $150 million receivables securitization is based on a designated short-
term interest rate plus an agreed upon spread (6.75% at December 31, 2000). Of
the total securitization facility, $125 million matures in April 2002 with the
remainder in September 2003, and was fully utilized at December 31, 2000 and
1999. Both facilities require CompuCom to maintain compliance with selected
financial covenants and ratios. CompuCom's weighted-average interest rate on
borrowings was approximately 8.2%, 7.7% and 6.6%, in 2000, 1999 and 1998,
respectively.
Aggregate maturities of long-term debt during future years are (in millions):
$5.2--2001; $0.7--2002; $0.6--2003; $0.5--2004; $0.5--2005; and $11.2--
thereafter.
8. Convertible Subordinated Notes
In June 1999, the Company issued $200 million of 5% convertible subordinated
notes (1999 notes) due June 15, 2006. Interest is payable semi-annually. The
1999 notes are redeemable in whole or in part at the option of the Company on or
after June 18, 2002, for a maximum of 102.5% of face value depending on the date
of redemption and subject to certain restrictions. The 1999 notes are
convertible into the Company's common stock subject to adjustment under certain
conditions including rights offerings and Safeguard Subscription Programs to the
Company's shareholders. Pursuant to the terms of the 1999 notes, the conversion
rate of the notes at December 31, 2000 was $24.1135 of principal amount per
share.
9. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31 2000 1999
- ------------------------------------------------------------------------
Accrued payroll and payroll taxes $ 37,815 $ 35,351
Accrued cost of software and
licenses 24,079 24,083
Deferred revenue 13,956 3,371
Accrued restructuring charge 2,490 1,800
Other 52,382 62,266
- ------------------------------------------------------------------------
$130,722 $126,871
- ------------------------------------------------------------------------
10. Shareholders' Equity
Common Stock
In April 2000, the Company completed a follow-on public offering, selling 8.6
million shares of its common stock, including exercise in full of the
underwriters' over-allotment option, at $50 per share. Net proceeds to the
Company were approximately $414 million (net of underwriters' commission and
offering expenses of approximately $17 million).
The Company received $200 million in total proceeds from the sale of its
common stock to strategic investors, including 2.0 million shares sold to IBM
and Compaq in April 2000 at $50 per share, and 2.2 million shares sold to
Textron at $45.83 per share in March 2000.
The Company purchased $46 million, $3 million and $19 million of its common
stock in the open market in 2000, 1999 and 1998, respectively, at an average
price of $30.42 in 2000, $17.97 in 1999 and $8.11 in 1998.
Preferred Stock
Shares of preferred stock, par value $10 per share, are voting and are issuable
in one or more series with rights and preferences as to dividends, redemption,
liquidation, sinking funds, and conversion determined by the Board of Directors.
At December 31, 2000 and 1999, there were one million shares authorized and none
outstanding.
Shareholders' Rights Plan
In February 2000, the Company adopted a shareholders' rights plan. Under the
plan, each shareholder of record on March 24, 2000 received the right to
purchase 1/1000 of a share of the Company's Series A Junior Participating
Preferred Stock at the rate of one right for each share of the Company's common
stock then held of record. Each 1/1000 of a share of the Company's Series A
Junior Participating Preferred Stock is designed to be equivalent in voting and
dividend rights to one share of the Company's common stock. The rights will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or commences a tender or exchange offer that
would result in such a person or group owning 15% or more of the Company's
common stock. If the rights do become exercisable, the Company's shareholders,
other than the shareholders that caused the rights to become exercisable, will
be able to exercise each right at an exercise price of $300 and receive shares
of the Company's common stock having a market value equal to approximately twice
the exercise price. As an alternative to paying the exercise price in cash, if
the directors of the Company so determine, shareholders may elect to exercise
their rights and, without the payment of any exercise price, receive half the
number of shares of common stock that would have been received had the exercise
price been paid in cash.
Stock-Based Compensation
The Company's 1999 Equity Compensation Plan provides for the grant of stock
options, restricted stock awards, stock appreciation rights and performance
units to employees, directors and consultants, with 9.0 million shares reserved
for issuance. In 1999, the Company granted 300,000 options outside of existing
option plans. Generally, outstanding options vest over four years after the date
of grant and expire eight years after the date of grant. To the extent
allowable, all grants are incentive stock options. All options granted under the
plans to date have been at prices which have been equal to the fair market value
at the date of grant. At December 31, 2000, the Company reserved 13.1 million
shares of common stock for possible future issuance under its stock option
plans. In February 2001, the Company's Board of Directors approved up to 1.2
million shares for issuance under stock option plans to persons other than
directors and executive officers of the Company. Several subsidiaries and most
partner companies also maintain stock option plans for their employees and
directors. Option activity is summarized below (in thousands except per share
amounts):
2000 1999 1998
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 7,097 $ 19.28 4,791 $ 7.36 5,211 $ 5.86
Options granted 5,909 18.22 4,056 27.59 936 9.12
Options exercised (567) 6.60 (1,615) 5.58 (1,323) 2.04
Options canceled (410) 22.47 (135) 10.12 (33) 11.99
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of year 12,029 $ 19.22 7,097 $19.28 4,791 $ 7.36
- --------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 4,196 1,865 2,589
Shares available for future grant 1,073 6,759 1,518
The following summarizes information about the
Company's stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Life Exercise Exercisable Exercise
Prices (in thousands) (in years) Price (in thousands) Price
- --------------------------------------------------------------------------------------------------
$1.44 186 1.0 $ 1.44 186 $ 1.44
1.75 - 5.28 3,276 7.8 5.19 1,455 5.07
6.53 - 10.81 1,926 4.9 8.99 1,260 9.05
10.92 - 14.97 1,877 5.8 12.27 656 12.05
20.00 - 30.47 2,304 7.3 27.18 176 23.17
30.98 - 59.33 2,407 6.9 44.31 463 42.57
67.44 - 89.72 53 7.2 80.70 -- --
- --------------------------------------------------------------------------------------------------
$1.44 - $89.72 12,029 6.6 $19.22 4,196 $12.09
- --------------------------------------------------------------------------------------------------
In 2000, the Company modified certain stock options as a result of severance
agreements. Additionally, included in options granted in 2000 are 97,500
options granted to non-employee consultants. These options vest immediately and
have a term of four years. The fair value of these options was determined using
the Black-Scholes method assuming a volatility of 75%, a dividend yield of 0%,
an average expected option life of four years and a risk-free interest rate of
6.75%. The Company also granted 75,000 shares of its common stock with a fair
value on the date of grant of $48.21 per share. These shares vested immediately.
The Company recorded general and administrative expenses of $12.1 million in
2000 related to the above transactions.
The Company, its subsidiaries and its partner companies accounted for under
the equity method apply APB 25 and related interpretations in accounting for
stock option plans. Had compensation cost been recognized consistent with SFAS
123, the Company's consolidated net income (loss) and income (loss) per share
would have been reduced to the pro forma amounts indicated below (in thousands
except per share amounts):
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated net income (loss) As reported $(212,404) $123,526 $110,123
Pro forma $(251,340) $110,057 $ 99,411
Income (loss) per share
Basic As reported $ (1.86) $ 1.22 $ 1.15
Pro forma $ (2.20) $ 1.09 $ 1.04
Diluted As reported $ (1.87) $ 1.16 $ 1.07
Pro forma $ (2.21) $ 1.04 $ 0.97
Per share weighted average fair
value of stock options issued on
date of grant $ 12.08 $ 15.95 $ 4.38
- ----------------------------------------------------------------------------------------------------------------------------------
The following range of assumptions were used by the Company, and its
subsidiaries, and its companies accounted for under the equity method to
determine the fair value of stock options granted in 2000, 1999 and 1998 using
the Black-Scholes option-pricing model:
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Company
Dividend yield 0% 0% 0%
Expected volatility 77% 60% to 75% 48%
Average expected option life 5 years 5 years 5 years
Risk-free interest rate 5.0% to 6.5% 5.3% to 6.6% 4.4% to 5.8%
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Subsidiaries and Equity Method Companies
Dividend yield 0% 0% 0%
Expected volatility 0% to 157% 0% to 100% 0% to 100%
Average expected option life 2 to 10 years 4 to 5 years 4 to 6 years
Risk-free interest rate 5.0% to 6.8% 5.0% to 6.6% 4.2% to 5.9%
11. Restructuring
In 2000, CompuCom effected a restructuring plan designed to reduce its cost
structure by closing its distribution facility located in Houston, Texas,
closing and consolidating three office facilities and reducing its workforce. As
a result, CompuCom recorded a restructuring charge of $5.2 million in the first
quarter of 2000. During 1998, CompuCom recorded a $16.4 million restructuring
charge, primarily consisting of costs associated with the closing of facilities
and disposing of related fixed assets as well as employee severance related to a
reduction in workforce. Both charges are reflected as a separate line item in
the consolidated statements of operations. Restructuring activity during 2000 is
summarized as follows (in thousands):
Accrual at Restructuring Cash Accrual at
Dec. 31, 1999 Charge Payments Other Dec. 31, 2000
- -----------------------------------------------------------------------------------------------------------------------
Restructuring - 2000
Lease termination costs -- $2,904 $ (876) $(258) $1,770
Employee severance and related benefits -- 1,800 (1,774) (16) 10
Other -- 465 (87) (378) --
- -----------------------------------------------------------------------------------------------------------------------
-- $5,169 $(2,737) $(652) $1,780
- -----------------------------------------------------------------------------------------------------------------------
Restructuring - 1998
Lease termination costs $1,240 $(1,155) $ 625 $ 710
Employee severance and related benefits 560 (514) (46) --
- -----------------------------------------------------------------------------------------------------------------------
$1,800 $(1,669) $ 579 $ 710
- -----------------------------------------------------------------------------------------------------------------------
Restructuring - 2000
Lease termination costs include the estimated cost to close the three office
facilities and represent the amount required to fulfill CompuCom's obligations
under signed lease contracts, the net expense expected to be incurred to sublet
the facilities or the estimated amount to be paid to terminate the lease
contracts before the end of their terms. In developing the estimated costs,
CompuCom has consulted with a professional real estate firm with knowledge of
market rent rates in all applicable markets where CompuCom has space.
Severance is paid based on associates' years of service and their level within
the organization. The reduction in workforce included 308 associates, of which
one was an executive officer. The remaining severance accrual relates to
payments to the former officer and were paid in January 2001. Other
restructuring charges primarily include the write-off of leasehold improvements
at the Houston distribution center. Based on revised estimates during 2000, the
total accrual was reduced by $0.7 million.
Restructuring - 1998
The amount accrued at December 31, 2000 for lease termination costs relates to
nine leases of the original 65 leases which have not been terminated and
represents the amount required to fulfill CompuCom's obligations under signed
lease contracts, the net expense expected to be incurred to sublet the
facilities or the estimated amount to be paid to terminate the lease contracts
before the end of their terms.
Based on revised estimates during 2000, $46,000 of the severance related
accrual was reversed. Also, additional expenses related to lease termination
costs of approximately $0.6 million were recorded during 2000 due to changes in
estimates on remaining properties.
The remaining restructuring accruals at December 31, 2000, reflected in
accrued liabilities on the consolidated balance sheets, are expected to be
adequate to cover actual amounts to be paid. Differences, if any, between the
estimated amounts accrued and actual amounts paid will be reflected in operating
expenses in future periods.
12. Gains on Issuance of Stock by Affiliates
Gains on issuance of stock by affiliates represent gains or losses on the
issuance of stock by the Company's affiliates to reflect the change in the
Company's share of the net equity of these companies. For the year ended
December 31, 1999, the Company recognized $173 million of gains related to the
issuance by Internet Capital Group of 31 million shares of its common stock in
its initial public offering in August 1999, seven million shares of its common
stock in a follow-on public offering in December 1999 and approximately three
million shares in private placements and acquisitions completed in the fourth
quarter of 1999. This pretax gain represents the increase in the Company's share
of Internet Capital Group's net equity as a result of its stock issuances. In
1999 and 1998, the Company recorded additional gains on stock issued by partner
companies as a result of stock option exercises.
13. Other Income, Net
Other income, net, consists of the following (in thousands):
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------- --------
Gain on sale of public holdings $ 62,573 $ 64,936 $ 17,693
Gain on sale of private partner companies 55,658 4,532 --
Gain on the Coherent/Tellabs merger -- -- 245,261
Unrealized gain (loss) on trading securities (5,025) 78,163 (48,549)
Other, primarily impairment charges (20,101) (19,227) (5,708)
- --------------------------------------------------------------------- --------
$ 93,105 $128,404 $208,697
- --------------------------------------------------------------------- --------
During 2000, the Company sold shares of public holdings, including Diamond
Technology Partners and eMerge Interactive (in its IPO), for aggregate net
proceeds of $94.2 million and recorded gains of $62.6 million. During 1999, the
Company sold shares of public holdings, including Diamond Technology Partners,
and Internet Capital Group and Pac-West Telecomm (in their IPOs), for aggregate
net proceeds of $75.9 million and recorded gains of $64.9 million. During
1998, the Company sold shares of public holdings, including Cambridge Technology
Partners, for aggregate net proceeds of $23.3 and recorded gains of $17.7
million.
During 2000, the Company sold several of its holdings in private partner
companies, including Arista Learning Systems, Extant Communications and
Multigen. The aggregate net proceeds, including proceeds from the subsequent
sales of stock received in the transactions, totaled $66.1 million, of which
$6.0 million was held in escrow. The Company recorded net gains of $55.7
million on the sale of private partner companies in 2000.
Included in other income, net, for the years ended December 31, 2000, 1999 and
1998 are impairment charges of approximately $20.7 million, $16.4 million and
$17.0 million for certain equity holdings accounted for under the cost method
judged to have experienced an other than temporary decline in value. For the
year ended December 31, 2000, the impairment charges included a total of $17.9
million as a result of the decline in two public partner company stock prices.
14. Income Taxes
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------
Current $ 27,868 $21,117 $32,515
Deferred (128,191) 45,397 28,909
- ----------------------------------------------------------------------------
$(100,323) $66,514 $61,424
- ----------------------------------------------------------------------------
State taxes on income included above $ 750 $ 565 $ 776
- ----------------------------------------------------------------------------
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% to income before income taxes as a result of
the following:
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------
Statutory tax provision 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill amortization (0.6) 1.0 0.9
Non-deductible compensation (0.5) -- --
Book/tax basis difference on securities sold -- (1.7) (0.4)
State taxes, net of federal tax benefit (0.2) 0.2 0.4
Income taxed at rates other than statutory rate (1.6) 0.5 (0.1)
- ----------------------------------------------------------------------------
32.1% 35.0% 35.8%
- ----------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the non-current deferred tax assets and deferred tax liabilities are
presented below (in thousands):
December 31 2000 1999
- -----------------------------------------------------------------------------
Deferred tax assets:
Subsidiary/investee carrying values $131,414 $ 22,010
Accounts receivable and inventories, reserves and
tax capitalized costs 2,624 14,152
Other 1,274 3,400
- -----------------------------------------------------------------------------
135,312 39,562
Deferred tax liabilities:
Subsidiary/investee carrying values (87,052) (123,709)
Accelerated depreciation (600) (626)
Unrealized appreciation on holdings (2,870) (24,943)
Other (5,082) (840)
- -----------------------------------------------------------------------------
(95,604) (150,118)
- -----------------------------------------------------------------------------
Net deferred tax asset (liabilities) $ 39,708 $(110,556)
- -----------------------------------------------------------------------------
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its holdings in the common stock of its
subsidiaries (such difference relates primarily to unremitted income of the
subsidiaries), because it does not expect this basis difference to become
subject to tax at the parent level. The Company believes it can implement
certain tax strategies to recover its basis in these subsidiaries tax-free.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences.
15. Net Income (Loss) Per Share
The calculations of net income (loss) per share were (in thousands except per
share amounts):
Year Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------
Basic:
Net income (loss) $(212,404) $123,526 $110,123
- --------------------------------------------------------------------------
Average common shares outstanding 114,068 101,134 95,499
- --------------------------------------------------------------------------
Basic $ (1.86) $ 1.22 $ 1.15
- --------------------------------------------------------------------------
Diluted:
Net income (loss) $(212,404) $123,526 $110,123
Effect of: Public holdings (590) (595) (606)
Dilutive securities -- 5,178 2,967
- --------------------------------------------------------------------------
Adjusted net income (loss) $(212,994) $128,109 $112,484
- --------------------------------------------------------------------------
Average common shares outstanding 114,068 101,134 95,499
Effect of: Dilutive options -- 2,605 1,662
Dilutive securities -- 7,171 7,581
- --------------------------------------------------------------------------
Average common shares assuming
dilution 114,068 110,910 104,742
- --------------------------------------------------------------------------
Diluted $ (1.87) $ 1.16 $ 1.07
- --------------------------------------------------------------------------
Approximately 2.6 million weighted average common stock equivalents related to
stock options and approximately 8.3 million shares representing the weighted
average effect of assumed conversion of the convertible subordinated notes were
excluded from the denominator in the calculation of diluted loss per share for
the year ended December 31, 2000, because their effect was anti-dilutive.
16. Related Party Transactions
Through April 2000, the Company charged administrative service fees to certain
partner companies for strategic and operational support that it provided in the
normal course of its business. These services were provided by the Company's
employees and outside consultants. In 2000, 1999 and 1998, the Company received
$0.1 million, $1.9 million and $2.1 million, respectively, for these services.
The Company's affiliates have transactions in the normal course of business
with other affiliates. For example, CompuCom incurred consulting-related
expenses of $1.1 million and $3.5 million in 2000 and 1999, respectively, for
services provided by affiliates of Safeguard. Additionally, the Company leased
space to certain affiliates.
During the third quarter of 2000, the Company formed a captive insurance
subsidiary for the purpose of providing insurance services to the Company and
its partner companies. Accruals are based on claims filed and estimates of
claims incurred but not reported. There were no amounts paid in 2000 and no
amounts accrued at December 31, 2000.
In 1999, the Company purchased 367,866 shares of Tangram for approximately
$0.8 million from an officer and director of Tangram.
The Company has loans due from employees and officers of $0.6 million at
December 31, 2000. Each loan is a full-recourse loan secured by a pledge of
restricted shares. The interest rates range
from 5.43% to 6.46%, with due dates ranging from December 2001 to May 2002.
During October 2000, the Company extended a $10 million loan to the Company's
Chairman and CEO and guaranteed a $35 million loan, each in connection with
margin loan arrangements. In December 2000, the $10 million loan including
accrued interest was repaid in full. The guarantee arrangement is secured by
interests in securities and real estate. As of December 31, 2000 and March 15,
2001, in addition to the securities and real estate collateral, the Company
holds $0.9 million and $2.3 million, respectively, in a cash account which was
deposited by the Company's Chairman and CEO to further collateralize the
Company's obligations under the guarantee. The liability associated with this
deposit is included in accrued expenses on the consolidated balance sheets.
In 1999, the Company loaned an officer of the Company $0.5 million evidenced
by a term note receivable. Interest on the note accrues at the prime rate (9.5%
at December 31, 2000), and principal and interest on the note is due in July
2002. In 2000, the Company advanced this same officer a swing loan in connection
with the purchase of his house. This loan was repaid in full with interest
within 15 days.
In 1999, the Company loaned an officer and a director of CompuCom $0.8 million
to exercise CompuCom stock options. Interest on the note accrues at a rate of
4.3% per annum, and principal on the note is due on December 31, 2001. In
February 2001, the individual transferred shares of CompuCom's common stock to
the Company in satisfaction of the note receivable plus accrued interest.
In 1998, the Company loaned an officer and director of the Company $0.5
million evidenced by a term note receivable. The note was repaid in full with
interest in March 1999.
In 1994 and 1998, CompuCom loaned an officer and director $1.2 million and
$2.0 million, evidenced by term notes receivable. The loans were used to
purchase shares of CompuCom's common stock. Interest on the notes accrues at
rates of 6.0% and 5.1% per annum, respectively. Principal on the notes is due
on October 2001 and August 2003, respectively. In January 2000, the individual
transferred shares of CompuCom's common stock to CompuCom in satisfaction of the
two notes receivable plus accrued interest.
In 1997 and 1999, CompuCom loaned an officer and director $0.7 million and
$0.6 million, evidenced by term notes receivable. Portions of the loan proceeds
were used to exercise stock options. Interest on the notes accrues at rates of
6.25% and 5.74% per annum, respectively. Principal on the notes is due in
November 2001. In February 2001, the individual transferred shares of
CompuCom's common stock to CompuCom in satisfaction of the two notes receivable
plus accrued interest.
Also in 1998, CompuCom loaned an officer and director $0.8 million evidenced
by a term note receivable. Interest on the note accrues at a rate of 4.33% per
annum and is payable upon maturity of the note, which is December 31, 2001. The
loan proceeds were used to exercise stock options. In February 2001, the
individual transferred shares of CompuCom's common stock to CompuCom in
satisfaction of the note receivable plus accrued interest.
The CEO of Internet Capital Group, of which the Company owns a 14% voting
interest, is a member of the Company's Board of Directors.
In 1998, the Company acquired shares of Series A Convertible Preferred Stock
of MegaSystems, Inc. for approximately $7.1 million. MegaSystems provides large
format motion picture equipment and related consulting services. During 1999
and 2000, the Company provided debt financing to MegaSystems in the aggregate
amount of approximately $2.1 million, bearing interest at 8% per annum. In
connection with these financings, the Company also received warrants to purchase
preferred or common stock. All of the debt was due on March 3, 2001 and has not
been repaid. The Company has also guaranteed $6.4 million of MegaSystem's
performance obligations under various agreements. The CEO of MegaSystems, who
is the spouse of the Company's Chairman and CEO, owns common stock of
MegaSystems representing approximately 15% of its fully converted common stock.
In May 1999, the Company loaned $2.5 million to Allied Resource Corporation.
The loan accrued interest at the prime rate plus 1%, and was repaid in full with
accrued interest in May 2000. In connection with this loan, Allied issued to
the Company warrants to purchase 62,500 shares of class A common stock at an
exercise price of $10.00. Dr. Schimmelbusch, a director of the Company, is
chairman and a significant stockholder of Allied.
In May 2000, the Company acquired for $1 million a 5% equity position in
Neuronyx, Inc., a biotechnology company founded by one of the Company's
directors, Hubert J.P. Schoemaker. Dr. Schoemaker is president, chairman and a
significant stockholder of Neuronyx.
17. Commitments and Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company and its subsidiaries conduct a portion of their operations in
leased facilities and lease machinery and equipment under leases expiring at
various dates to 2019. Total rental expense under operating leases was $14.4
million, $12.4 million and $11.7 million in 2000, 1999 and 1998, respectively.
Future minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more at December 31, 2000, are (in millions):
$11.0--2001; $10.3--2002; $9.6--2003; $7.0--2004; and $4.4--2005.
In connection with its ownership interests in certain affiliates, the Company
guaranteed $12 million of bank loan and other commitments, and committed capital
of approximately $169 million to various affiliates, to be funded over the next
several years, including approximately $90 million which is expected to be
funded in the next twelve months.
Because many of the Company's affiliates are not majority-owned subsidiaries,
changes in the value of the Company's interests in affiliates and the income or
loss attributable to them could require the Company to register under the
Investment Company Act unless it takes action to avoid being required to
register. However, the Company believes it is not an investment company and can
take steps to avoid being required to register under the Investment Company Act
which would not adversely affect its operations or shareholder value.
18. Parent Company Financial Information
The Company's consolidated financial statements for the years ended December 31,
2000, 1999 and 1998 reflect certain entities accounted for under the
consolidation method of accounting as discussed in note 1.
Parent company financial information is provided to present the financial
position and results of operations of the Company as if the consolidated
companies were accounted for under the equity method of accounting for all
periods presented during which the Company owned its interest in these
companies.
The carrying value of the Company's less than wholly owned subsidiaries,
primarily CompuCom, Tangram and SOTAS at December 31, 2000, and including Arista
and aligne at December 31, 1999, are included in ownership interests in and
advances to affiliates in the consolidated balance sheets. The Company's share
of the income or losses of CompuCom and Tangram for 2000, 1999 and 1998, and
SOTAS, aligne and Arista in 2000 and 1999 are reflected in equity loss in the
consolidated statements of operations (in thousands).
Balance Sheets
December 31 2000 1999
- ----------------------------------------------------------------------
Assets
Cash and cash equivalents,
restricted cash and short-
term investments $ 204,004 $ 33,536
Other current assets 33,468 39,204
Ownership interests in and
advances to affiliates 759,914 687,925
Available-for-sale securities 214,233 302,940
Other 113,415 45,584
- ----------------------------------------------------------------------
Total Assets $1,325,034 $1,109,189
- ----------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities $ 42,899 $ 35,621
Long-term debt 13,421 14,354
Other long-term liabilities 164,277 284,513
Convertible subordinated 200,000 200,000
notes
Shareholders' equity 904,437 574,701
- ----------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $1,325,034 $1,109,189
- ----------------------------------------------------------------------
Statements of Operations
Year Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------
Revenue $ 37,614 $ 14,849 $ 12,769
Operating expenses 108,770 45,093 25,868
- -------------------------------------------------------------------------------
(71,156) (30,244) (13,099)
Gains on issuance of stock by affiliates -- 175,662 3,782
Other income, net 92,115 128,404 209,646
Interest and financing expense, net (7,046) (13,014) (7,587)
- -------------------------------------------------------------------------------
Income before income taxes and equity loss 13,913 260,808 192,742
Income taxes 102,462 (61,884) (61,010)
Equity loss (328,779) (75,398) (21,609)
- -------------------------------------------------------------------------------
Net income (loss) $(212,404) $123,526 $110,123
- -------------------------------------------------------------------------------
19. Supplemental Non-cash Financing and
Investing Activities
During the years ended December 31, 2000, 1999 and 1998, the Company converted
$30.8 million, $12.9 million and $10.8 million, respectively, of advances to
affiliates into ownership interests in affiliates. Additionally, in 1999, in
connection with the reverse merger of Pacific Title/Mirage into Lifef/x, the
Company received warrants convertible into approximately 10 million shares of
Lifef/x in exchange for conversion of all of the outstanding debt of Pacific
Title/Mirage.
Interest paid in 2000, 1999 and 1998 was $28.9 million, $39.3 million and
$31.5 million, respectively, of which $10 million, $7.3 million and $4.9 million
in 2000, 1999 and 1998, respectively, related to the Company's convertible
subordinated notes.
Cash paid for taxes in the years ended December 31, 2000, 1999 and 1998 was
$28.2 million, $36.6 million and $9.8 million, respectively.
As discussed in note 3, the Company issued 0.2 million and 1.3 million shares
of the Company's common stock in 2000 and 1999, respectively, to acquire
interests in partner companies.
In 1999, $71.3 million of convertible subordinated notes (1996 notes) were
converted into 7.4 million shares of the Company's common stock.
During the years ended December 31, 2000, 1999 and 1998, the Company received
stock distributions from its interests in private equity funds with a fair value
at the time of distribution of $56.0 million, $4.3 million and $1.8 million,
respectively.
During the year ended December 31, 1998, the Company exchanged all of its
holdings in Coherent and Integrated Systems Consulting Group for shares of
Tellabs and First Consulting Group, respectively.
20. Operating Segments
Our reportable segments include General Safeguard Operations, Partner Company
Operations and CompuCom Operations. General Safeguard Operations includes the
expenses of providing strategic and operational support to the Company's partner
companies and private equity funds, and also includes the effect of certain
private equity funds which the Company accounts for under the equity method.
General Safeguard Operations also includes the effect of transactions and other
events incidental to the Company's ownership interests in its partner companies
and its operations in general. Partner Company Operations reflects the
operations of all of the Company's partner companies other than CompuCom
(included in CompuCom Operations). The partner companies included under Partner
Company Operations are accounted for under either the consolidated or the equity
method. CompuCom Operations includes the results of our majority-owned
subsidiary, CompuCom. The following table reflects consolidated operating data
by reported segments (in thousands). All significant intersegment activity has
been eliminated. Accordingly, segment results reported exclude the effect of
transactions between the Company and its subsidiaries. Assets are the owned or
allocated assets used by each operating segment.
Year Ended December 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Net Income (Loss)
General Safeguard Operations $ 58,883 $ 173,006 $ 122,488
Partner Company Operations (274,260) (57,192) (12,441)
CompuCom Operations 2,973 7,712 76
- ----------------------------------------------------------------------------------------------------------------------
$ (212,404) $ 123,526 $ 110,123
- ----------------------------------------------------------------------------------------------------------------------
General Safeguard Operations
Revenue $ 22,299 $ 13,912 $ 11,949
Operating expenses
General and administrative 88,042 43,429 24,413
Depreciation and amortization 2,178 1,664 1,443
------------------------------------------------------------
Total operating expenses 90,220 45,093 25,856
------------------------------------------------------------
(67,921) (31,181) (13,907)
Gains on issuance of stock by affiliates -- 175,662 3,782
Other income, net 92,115 128,404 209,646
Interest and financing expense, net (6,949) (13,443) (7,964)
------------------------------------------------------------
Income before income taxes and equity income 17,245 259,442 191,557
Income taxes (35,270) (87,018) (69,069)
Equity income 76,908 582 --
- ----------------------------------------------------------------------------------------------------------------------
Net Income from General Safeguard Operations $ 58,883 $ 173,006 $ 122,488
- ----------------------------------------------------------------------------------------------------------------------
Partner Company Operations
Revenue $ 37,445 $ 27,469 $ 20,678
Operating expenses
Cost of sales 16,346 8,082 2,426
Selling and service 16,169 8,875 8,087
General and administrative 12,124 13,572 5,309
Depreciation and amortization 8,182 5,497 2,872
------------------------------------------------------------
Total operating expenses 52,821 36,026 18,694
------------------------------------------------------------
(15,376) (8,557) 1,984
Other income, net -- -- (949)
Interest and financing expense, net (1,573) (330) (272)
------------------------------------------------------------
Income (loss) before income taxes, minority
interest and equity loss (16,949) (8,887) 763
Income taxes 138,546 25,435 7,693
Minority interest 973 (66) --
Equity loss (396,830) (73,674) (20,897)
- ----------------------------------------------------------------------------------------------------------------------
Net Loss from Partner Company Operations $ (274,260) $ (57,192) $ (12,441)
- ----------------------------------------------------------------------------------------------------------------------
CompuCom Operations
Revenue
Product sales $2,439,106 $2,648,342 $2,007,744
Service sales 271,531 303,922 273,887
------------------------------------------------------------
2,710,637 2,952,264 2,281,631
Operating expenses
Cost of sales 2,425,496 2,633,194 1,996,417
Selling and service 134,182 156,163 159,628
General and administrative 99,040 94,445 72,813
Depreciation and amortization 23,102 23,367 17,423
Restructuring 5,417 387 16,437
------------------------------------------------------------
Total operating expenses 2,687,237 2,907,556 2,262,718
------------------------------------------------------------
23,400 44,708 18,913
Other income, net 990 -- --
Interest and financing expense, net (15,278) (23,195) (18,742)
------------------------------------------------------------
Income before income taxes and minority interest 9,112 21,513 171
Income taxes (2,953) (4,931) (48)
Minority interest (3,186) (8,870) (47)
- ----------------------------------------------------------------------------------------------------------------------
Net Income from CompuCom Operations $ 2,973 $ 7,712 $ 76
- ----------------------------------------------------------------------------------------------------------------------
December 31 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Assets
General Safeguard Operations
Cash and cash equivalents, short-term investments
and restricted cash $ 202,440 $ 32,934
Other 429,815 97,018
- -----------------------------------------------------------------------------------------------------------------
632,255 129,952
- -----------------------------------------------------------------------------------------------------------------
Partner Company Operations
Ownership interests in and advances to affiliates 276,526 499,244
Available-for-sale securities 214,233 302,940
Other 85,051 64,436
- -----------------------------------------------------------------------------------------------------------------
575,810 866,620
- -----------------------------------------------------------------------------------------------------------------
CompuCom Operations 440,194 503,307
- -----------------------------------------------------------------------------------------------------------------
Total $1,648,259 $1,499,879
- -----------------------------------------------------------------------------------------------------------------
21. Subsequent Events
From January 1, 2001 through March 15, 2001, the Company funded $34 million of
commitments made prior to December 31, 2000. Additionally, from January 1, 2001
through March 15, 2001, the Company committed $7 million and funded $4 million
to acquire ownership interests in or make advances to new and existing
affiliates.
In January 2001, the Company completed the acquisition of 100% of Palarco,
Inc., a provider of global information technology solutions.
In January 2001, CompuCom purchased certain assets of MicroAge Technology
Services, L.L.C. (MTS). These assets were used by MTS primarily in its business
as a systems integrator of personal computer products.
On March 12, 2001, Novell, Inc. announced its intention to acquire all of the
outstanding stock of one of the Company's affiliates, Cambridge Technology
Partners, in exchange for Novell stock. The transaction is expected to close in
the second quarter of 2001.
22. Selected Quarterly Financial Information
(Unaudited)
Three Months Ended March 31 June 30 September 30 December 31
- ----------------------------------------------- -------- -------- -------- -----------
(in thousands except per share data)
2000
Revenue $587,486 $712,675 $742,646 $ 727,574
Net Income (Loss) Before Income
Taxes, Minority Interest
and Equity Income (Loss) 7,870 16,102 25,866 (40,430)
Net Income (Loss) 29,598 2,170 (25,188) (218,984)
Net Income (Loss) Per Share(a)
Basic $ 0.28 $ 0.02 $ (0.22) $ (1.87)
Diluted $ 0.26 $ 0.02 $ (0.22) $ (1.88)
1999
Revenue $509,013 $823,713 $914,092 $ 746,827
Net Income Before Income
Taxes, Minority Interest
and Equity Income (Loss) 48,307 30,521 34,388 158,852
Net Income 24,148 11,513 9,317 78,548
Net Income Per Share(a)
Basic $ 0.25 $ 0.11 $ 0.09 $ 0.75
Diluted $ 0.24 $ 0.11 $ 0.09 $ 0.70
(a) Per share amounts for the quarters have each been calculated separately.
Accordingly, quarterly amounts may not add to the annual amounts because of
differences in the average common shares outstanding during each period.
Additionally, in regard to diluted per share amounts only, quarterly
amounts may not add to the annual amounts because of the inclusion of the
effect of potentially dilutive securities only in the periods in which such
effect would have been dilutive, and because of the adjustments to net
income for the dilutive effect of public holdings common stock equivalents
and convertible securities.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Safeguard Scientifics, Inc.:
We have audited the accompanying consolidated balance sheets of Safeguard
Scientifics, Inc. (the "Company") and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity, comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Safeguard
Scientifics, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 15, 2001
STATEMENT OF MANAGEMENT'S FINANCIAL RESPONSIBILITY
Management has prepared and is responsible for the integrity and objectivity of
the consolidated financial statements and related financial information in this
Annual Report. The statements are prepared in conformity with accounting
principles generally accepted in the United States. The financial statements
reflect management's informed judgment and estimation as to the effect of events
and transactions that are accounted for or disclosed.
Management maintains a system of internal control at each business unit. This
system, which undergoes continual evaluation, is designed to provide reasonable
assurance that assets are protected and records are adequate for the preparation
of reliable financial data. In determining the extent of the system of internal
control, management recognizes that the cost should not exceed the benefits
derived. The evaluation of these factors requires estimates and judgment by
management.
KPMG LLP is engaged to render an opinion as to whether management's financial
statements present fairly, in all material respects, Safeguard Scientifics,
Inc.'s financial condition and operating results in accordance with accounting
principles generally accepted in the United States of America. The scope of
their engagement included a review of the internal control system, tests of the
accounting records, and other auditing procedures to the extent deemed necessary
to render their opinion on the financial statements. Their report is presented
above.
The Audit Committee of the Board of Directors meets with the independent
auditors and management to satisfy itself that they are properly discharging
their responsibilities. The auditors have direct access to the Audit Committee.
Safeguard Scientifics, Inc.
/s/ Gerald A. Blitstein
Gerald A. Blitstein
Executive Vice President and Chief Financial Officer